Energy manager at the manufacturing facility is looking towards replacing aging low efficiency

furnace unit that is used to heat the production floor. Two alternatives are being considered:
A. High-efficiency forced air natural gas furnace with a cost of $32,000 that will have a present
value resale of $4,500 after 15 years,
B. Standard-efficiency natural gas furnace for $23,000 that will have a salvage value of $3,000 at
the end of its 15-year life. If the potential savings in terms of the reduced natural gas bills for the
facility are for option A): $9000 B): $7000 Find the best alternative using the lifecycle cost
approach and the BCR (benefit-to-cost-ratio) method. Assume that the facility uses a discount
rate of 15%. Do they provide the same answer? Why?
SELF:

Solution:

Header: Present Value

Context: The total savings cost over a course of duration is a dependent parameter upon the
present value of the product. The total present value keeps depreciating over the same course
of duration. The Benefit to cost ratio is beneficial if greater than one.

__Given Data__

*The cost of the furnace is: C  32000

*The present resale value is: S  4500

*The total time is: T  15 years

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A)

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The Savings in gas bill is 9000

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The total savings over 15 year period can be calculated as:

 1.1515  1 
PV  9000   
 0.15  1.15  15 
 
 52672

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The Life cycle cost can be calculated for the mentioned savings as:

Life Cycle cost = 32000  4500  52672

 25172
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The Savings in gas bill is 7000

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The total savings over 15 year period can be calculated as:

 1.1515  1 
PV  7000   
 0.15  1.15  15 
 
 40967

\\

The Present value can be calculated as:

3000
PV 
1.1515
 368

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The Life cycle cost can be calculated for the mentioned savings as:

Life Cycle cost = 23000  368  40967

 18335

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Thus, option A is a better choice as the life time cost is lower

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The total savings over 15 year period can be calculated as:

 1.1515  1 
PV  9000   
 0.15  1.15  15 
 
 52672

\\

The PV of costs can be calculated as:

PV = 32000  4500
 27500

\\

Thus, the Benefit to the Cost Ratio can be calculated as:

 52672
CR 
27500
 1.91

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The total savings over 15 year period can be calculated as:

 1.1515  1 
PV  7000   
 0.15  1.15  15 
 
 40967

\\

The PV of costs can be calculated as:

PV = 23000  368
 22632

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Thus, the Benefit to the Cost Ratio can be calculated as:

40967
CR 
22632
 1.81

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Thus, option A is better as its benefit to cost ratio is higher.

Thus, option A works out better as its savings in energy per year is significantly higher than
option B