BMFG 4623 ENGINEERING ECONOMY AND MANAGEMENT

TUTORIAL : Annual Worth Analysis

1. List three assumptions that are inherent in the annual worth method of comparing
alternatives.

2. Eight years ago, Melaka Trucking Sdn Bhd purchased a large-capacity dump truck for
RM115,000 to provide short-haul earthmoving services. The company sold it today for
RM45,000. Operating and maintenance costs averaged RM10,500 per year. A complete
overhaul at the end of year 4 cost an extra RM3600. Determine the annual cost of the truck
at 8% per year interest.
Answer:
AW = RM – 26, 741 per year

3. Ten years ago, Bukit Katil Enterprise purchased a wrecker for RM285,000 to move
disabled 18-wheelers. He anticipated a salvage value of RM50,000 after 10 years. During
this time his average annual revenue total RM52,000.
a) Analyse whether he recover his investment and a 12% per year return.
b) If the annual M&O cost was RM10,000 the first year and increased by a constant
RM1000 per year, determine the AW positive or negative at 12% per year with assuming
the RM50,000 salvage was realized.

Answer:
a. CR = RM – 47,590 per year
At revenue of RM 52,000 per year, yes he did

b. AW= RM –9,175 per year

AW was negative

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BMFG 4623 ENGINEERING ECONOMY AND MANAGEMENT

4. Sylvia has received a RM500,000 inheritance from her favourite, recently deceased aunt in
Perak. Sylvia is planning to purchase a condo in Perak in the same area where her aunt
lived all her life and to rent it to vacationers. She hopes to make 8% per year on this
purchase over an ownership period of 20 years. The condo’s total first cost is RM500,000,
and she conservatively expects to sell it for 90% of the purchase price. No annual M&O
costs are considered in the analysis.
a) Analyse the capital recovery amount.
b) If there is a real boom in rental real estate 10 years in the future, analyse the sales
price (as a percentage of original purchase price) is necessary at that time (year 10) to
realize the same amount as the 8% return expected over the 20-year ownership period.

Answer:
a. CR = RM – 41,093 per year

b. S= RM 484,166
Sales price must be at least 96.8% of purchase price 10 years earlier

5. Polypropylene wall caps, used for covering exterior vents for kitchen cooktops, bathroom
fans, dryers, and other building air exhausts, can be made by two different methods.
Method X will have a first cost of RM75,000, an operating cost of RM32,000 per year,
and a RM9000 salvage value after 4 years. Method Y will have a first cost of RM140,000,
an operating cost of RM24,000 per year, and a RM19,000 salvage value after its 4-year
life. At an interest rate of 10% per year, decide which method should be used on the basis
of an annual worth analysis.

Answer:
AWX = RM – 53, 721
AWY = RM – 64,072
Use method X since the AW of its costs is the lowest; it has the numerically largest AW value.

2 by: Nor Akramin Mohamad

BMFG 4623 ENGINEERING ECONOMY AND MANAGEMENT

6. A new structural design software package is available for analyzing and designing three-
sided guyed towers and three- and four-sided self-supporting towers. A single-user license
will cost RM6000 per year. A site license has a one-time cost of RM22,000. A structural
engineering consulting company is trying to decide between two alternatives: buy a single-
user license now and one each year for the next 3 years (which will provide 4 years of
service), or buy a site license now. Justify which strategy should be adopted at an interest
rate of 10% per year for a 4-year planning period using the annual worth method of
evaluation.
Answer:
AWSINGLE = RM – 6,600
AWSITE = RM – 6,940

Buy the single user license

7. The city council in a certain southwestern city is considering whether to construct

permanent restrooms in 22 of its smaller parks or pay for portable toilets on a year round
basis. The cost of constructing the 22 permanent restrooms will be RM3.8 million. The 22
portable restrooms can be rented for RM7500 each for 1 year. The service life of a
permanent restroom is 20 years. Using an interest rate of 6% per year and an annual worth
analysis, determine if the city should build the permanent restrooms or lease the portable
ones.
Answer:
a. AWPERMANENT = RM – 331,284
AWPORTABLE = RM – 165,000
The city should lease the restrooms

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BMFG 4623 ENGINEERING ECONOMY AND MANAGEMENT

8. Racing and Performance Motor Corporation wishes to evaluate two alternative CNC
machines for engine building. Use the AW method at 10% per year to select the better
alternative.

Machine R Machine S
First cost, RM 250,000 370,500
Annual Operating Cost, RM per year 40,000 50,000
Salvage value, RM 20,000 30,000
Life, years 3 5

Answer:
AWR = RM – 134,485
AWS = RM – 142,824

9. Compare two alternatives for a security system surrounding a power distribution

substation using annual worth analysis and an interest rate of 10% per year.

Condi Torro
First cost, RM 25,000 130,000
Annual Operating Cost, RM per year 9,000 2,500
Salvage value, RM 3,000 30,000
Life, years 3 ∞

Answer:
AWCONDI = RM – 18,146 per year
AWTORRO= RM – 15,947 per year
Select torro system because….

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BMFG 4623 ENGINEERING ECONOMY AND MANAGEMENT

10. A medium-size municipality plans to develop a software system to assist in project

selection during the next 10 years. A life-cycle cost approach has been used to categorize
costs into development, programming, operating, and support costs for each alternative.
There are three alternatives under consideration, identified as M, N, and O. The costs are
summarized below. Use an annual life-cycle cost approach to identify the best alternative
at 8% per year.

Answer:
LCCM = RM – 195, 157 per year
LCCN = RM – 139,719 per year
LCCO = RM – 175,000 per year
Select Alternative N

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