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  • May 2014 Q4

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    Chahak Bhalla
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    1) The document discusses different methods for comparing the costs of alternatives like CNC Plasma and CNC Laser that have different lifetimes. 2) It calculates the uniform annual worth and present worth of each alternative using formulas that annualize costs, payments, and salvage values. 3) Initially CNC Plasma is selected by both methods, but changing the salvage value of Laser to $140,786 makes the uniform annual worth of both alternatives equal, selecting Laser instead.

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    Solution to 11-CS-1 Engineering Economics Exams May 2014 Question 4

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    1) The document discusses different methods for comparing the costs of alternatives like CNC Plasma and CNC Laser that have different lifetimes. 2) It calculates the uniform annual worth and present worth of each alternative using formulas that annualize costs, payments, and salvage values. 3) Initially CNC Plasma is selected by both methods, but changing the salvage value of Laser to $140,786 makes the uniform annual worth of both alternatives equal, selecting Laser instead.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    10 views4 pages

    May 2014 Q4

    Uploaded by

    Chahak Bhalla
    1) The document discusses different methods for comparing the costs of alternatives like CNC Plasma and CNC Laser that have different lifetimes. 2) It calculates the uniform annual worth and present worth of each alternative using formulas that annualize costs, payments, and salvage values. 3) Initially CNC Plasma is selected by both methods, but changing the salvage value of Laser to $140,786 makes the uniform annual worth of both alternatives equal, selecting Laser instead.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 4

    a) The assumption is that they can be repeated any number of times with the

    same investment and benefit cash flows, for each such repetition. The
    alternatives are repeated for such number of times that the total lives become
    equal. The numbe of times to be repeated for each alternative is given by
    the formula LCM of the lives of the alternatives in years/The life of the alternative.
    b)
    CNC CNC
    Plasma Laser
    1) Annualized cost of down payment:
    = 90000*0.09*1.09^15/(1.09^15-1) = 11165
    =140000*0.09*1.09^20/(1.09^20-1) = 15337
    2) Annual payment 1400 1900
    3) Annualized maintenance cost:
    PV of annual maintenance cost (using PV formula for growing
    annuity)
    [P/(r-g)][1-((1+g)/(1+r))^n]
    Using an online calculator it is 12878 9745
    Annualized maintenance cost
    = 12878*0.09*1.09^15/(1.09^15-1) = 1598
    = 9745*0.09*1.09^20/(1.09^20-1) = 1068
    4) Operating cost per year 6300 4100
    5) Annualized salvage value:
    = 20000*0.09/(1.09^15-1) = 681
    = 50000*0.09/(1.09^20-1) = 977
    UNIFORM ANNUAL WORTH = [1]+[2]+[3]+[4]-[5]= 19782 21427
    As the UAW Cost of CNC Plasma is lower, it is to be selected.
    c)
    CNC CNC
    Plasma Laser
    1) Down payment 90000 140000
    2) PV of Annual payment
    = 1400*(1.09^15-1)/(0.09*1.09^15) = 11285
    = 1900*(1.09^20-1)/(0.09*1.09^20) = 17344
    3) PV of maintenance cost:
    PV of annual maintenance cost (using PV formula for growing
    annuity)
    [P/(r-g)][1-((1+g)/(1+r))^n]
    Using an online calculator it is 12878 9745
    4) PV of operating cost per year
    = 6300*(1.09^15-1)/(0.09*1.09^15) = 50782
    = 4100*(1.09^20-1)/(0.09*1.09^20) = 37427
    5) PV of salvage value:
    = 20000/(1.09^15) = 5491
    = 50000/(1.09^20) = 8922
    PRESENT WORTH = [1]+[2]+[3]+[4]-[5]= 159454 195595
    As the PW of the CNC Plasma is lower, it should be selected.
    d) Both the methods do not yield the same decision always. Different decisions
    would result when the lives of the alternatives are unequal.
    e) The calculations are revised for Laser for 15 years:
    CNC CNC
    Plasma Laser
    1) Annualized cost of down payment:
    = 90000*0.09*1.09^15/(1.09^15-1) = 11165
    =140000*0.09*1.09^15/(1.09^15-1) = 17368
    2) Annual payment 1400 1900
    3) Annualized maintenance cost:
    PV of annual maintenance cost (using PV formula for growing
    annuity)
    [P/(r-g)][1-((1+g)/(1+r))^n]
    Using an online calculator it is 12878 8089
    Annualized maintenance cost
    = 12878*0.09*1.09^15/(1.09^15-1) = 1598
    = 9745*0.09*1.09^15/(1.09^15-1) = 1209
    4) Operating cost per year 6300 4100
    5) Annualized salvage value:
    = 20000*0.09/(1.09^15-1) = 681
    = 0*0.09/(1.09^15-1) = 0
    UNIFORM ANNUAL WORTH = [1]+[2]+[3]+[4]-[5]= 19782 24577
    To be equal the, Uniform annual worth of the SV for Laser should be 24577-19782 = 4795
    So the salvage value should be 4795*(1.09^15-1)/0.09 = 140786
    CHECK:
    CNC CNC
    Plasma Laser
    1) Annualized cost of down payment:
    = 90000*0.09*1.09^15/(1.09^15-1) = 11165
    =140000*0.09*1.09^15/(1.09^15-1) = 17368
    2) Annual payment 1400 1900
    3) Annualized maintenance cost:
    PV of annual maintenance cost (using PV formula for growing
    annuity)
    [P/(r-g)][1-((1+g)/(1+r))^n]
    Using an online calculator it is 12878 8089
    Annualized maintenance cost
    = 12878*0.09*1.09^15/(1.09^15-1) = 1598
    = 9745*0.09*1.09^15/(1.09^15-1) = 1209
    4) Operating cost per year 6300 4100
    5) Annualized salvage value:
    = 20000*0.09/(1.09^15-1) = 681
    = 140786*0.09/(1.09^15-1) = 4795
    UNIFORM ANNUAL WORTH = [1]+[2]+[3]+[4]-[5]= 19782 19782
    The SV of laser should be more than $140,786, to make it a better choice.

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