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    ME40 Assignment 6

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    Benmar N. Ocol
    1. The document compares the equivalent annual cost of two machine options, Machine A and Machine B. Machine A has a lower EAC of $49,557 compared to Machine B's EAC of $48,921, so Machine A is the better option. 2. A firm is comparing leasing a truck for $30,000 annually versus buying it for $80,000 with $10,000 annual maintenance. Leasing has a lower equivalent annual cost so it is the better option. 3. A company is considering three generator options and comparing their equivalent annual costs to determine the best option. Generator HD has the lowest equivalent annual cost of $124,185.56 so it is the most

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    ME40 Assignment 6

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    Benmar N. Ocol
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    1. The document compares the equivalent annual cost of two machine options, Machine A and Machine B. Machine A has a lower EAC of $49,557 compared to Machine B's EAC of $48,921, so Machine A is the better option. 2. A firm is comparing leasing a truck for $30,000 annually versus buying it for $80,000 with $10,000 annual maintenance. Leasing has a lower equivalent annual cost so it is the better option. 3. A company is considering three generator options and comparing their equivalent annual costs to determine the best option. Generator HD has the lowest equivalent annual cost of $124,185.56 so it is the most

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    1. The document compares the equivalent annual cost of two machine options, Machine A and Machine B. Machine A has a lower EAC of $49,557 compared to Machine B's EAC of $48,921, so Machine A is the better option. 2. A firm is comparing leasing a truck for $30,000 annually versus buying it for $80,000 with $10,000 annual maintenance. Leasing has a lower equivalent annual cost so it is the better option. 3. A company is considering three generator options and comparing their equivalent annual costs to determine the best option. Generator HD has the lowest equivalent annual cost of $124,185.56 so it is the most

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    32 views3 pages

    ME40 Assignment 6

    Uploaded by

    Benmar N. Ocol
    1. The document compares the equivalent annual cost of two machine options, Machine A and Machine B. Machine A has a lower EAC of $49,557 compared to Machine B's EAC of $48,921, so Machine A is the better option. 2. A firm is comparing leasing a truck for $30,000 annually versus buying it for $80,000 with $10,000 annual maintenance. Leasing has a lower equivalent annual cost so it is the better option. 3. A company is considering three generator options and comparing their equivalent annual costs to determine the best option. Generator HD has the lowest equivalent annual cost of $124,185.56 so it is the most

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    Ocol Benmar ME40 (Engineering Economy)

    Mfge - 2 April 01, 2019


    Assignment

    EQUIVALENT ANNUAL COST

    1. As stated earlier, EAC allows managers to compare NPVs of different


    projects over different periods, to accurately determine the best
    option. Consider two alternative investments in machinery
    equipment:

     Machine A has the following:


    An initial capital outlay of $105,000
    An expected lifespan of three years
    An annual maintenance expense of $11,000

     Machine B has the following:


    An initial capital outlay of $175,000
    An expected lifespan of five years
    An annual maintenance expense of $8,500

    SOLUTION:

     Machine A: A(t,r) = (1 - (1 / (1 + 5%) ^ 3)) / 5% = 2.72

    EAC Machine A = $105,000 / 2.72 + $11,000 = $49,557

     Machine B: A(t,r) = (1 - (1 / (1 + 5%) ^ 5)) / 5% = 4.33

    EAC Machine B = $175,000 / 4.33 + $8,500 = $48,921


    2. A firm can lease a truck for 4 years at a cost of $30,000 annually. It
    can instead buya truck at a cost of $80,000, with annual
    maintenance expenses of $10,000. The truck will besold at the end
    of 4 years for $20,000. Which is the better option if the discount rate
    is 10percent?

    SOLUTION:

    PV = -80,000-10,0001.10-1.10(1.10)4+20,000(1.10)4

    = -80,000-10000[3.169865] + 13,600.27

    = -80,000-31,698.65 + 13,600.27 = -98,038.38

    𝑃𝑉
    EAA = 1 1
    −
    𝑅 𝑅(1+𝑅)𝑁

    −98,038.38
    = 1 1
    −
    0.10 0.10(1+0.10)4

    = -$30,928.25

    The EAA of leasing is less than the EAA of buying ,so you’d
    prefer to lease the truck
    3. A company bought a generator 10 years ago and its salvage
    value is worth P30,000. If the company is planning to buy a
    new one, they have three options. The generator is being
    used 15 hrs per year. The fourth option is not to buy a
    generator which would cost the company P20,000 per hour.

    HD WE GE
    200,000 170,000 190,000
    40,000 20,000 29,000
    5 years 7 years 6 years
    12% 12% 12%
    5000/hr 7000/hr 5900/hr

    AO – P5,000 per hour


    The generator is used 15 hours per year.
    AO – (5000)(15)
    AO – P75,000
    HD
    (1 + 𝑖)𝑛 (𝑖) (𝑖)
    𝐴𝐸𝐶 = 𝐴𝑂 + 𝐶0 ( ) − 𝐶𝐿 ( )
    (1 + 𝑖)𝑛 − 1 (1 + 𝑖)𝑛 − 1
    (1 + 0.12)5 (0.12) (0.12)
    𝐴𝐸𝐶 = 75,000 + 200,000 ( ) − 40,000 ( )
    (1 + 0.12)5 − 1 (1 + 0.12 − 1

    AE𝑪𝑯𝑫 = P124,185.56
    WE

    AO – (7000)(15)
    AECWE = P140,267.66

    GE
    AO = (5900)(15)
    AO = 88,5000
    AECGE = P131,139.34

    AE𝑪𝑯𝑫 is the lowest among the options. It is advisable to choose HD generator

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