Engineering Economics: Cost Analysis Methods
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Alwin lantinEngineering Economics: Cost Analysis Methods
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Alwin lantinCommon questions
Powered by AIThe present worth (PW) of the motor is calculated by considering both the energy and demand charges over the 10-year period and factoring in the motor's efficiency and operation duration. The motor's energy per year is calculated from its power rating and efficiency, leading to an annual energy charge. The demand charge is considered annually as a fixed cost based on the motor's power rating. The PW is then the sum of these cash inflows less the initial cost of the motor, adjusted using the present worth factor for a 15% MARR: PW = (Annual Energy and Demand Charge Cashflow)(P/A, 15%, 10) - Initial Cost = Php 14,082,937.47 .
The investment is justified through present worth analysis by comparing the calculated present worth of the motor's cash inflows and cash outflows over its 10-year operational life. A project is considered justified if the present worth is zero or positive, indicating that the anticipated cash inflows at least meet or exceed the initial costs when adjusted for the time value of money at the given MARR. A present worth equal to or greater than zero implies that the investment yields a return at least equal to the required rate of return (15% MARR), making it financially viable .
Energy charges are calculated based on the total annual electricity consumption of the motor, converted from horsepower to kilowatt-hours, and multiplied by the rate per kilowatt-hour. Demand charges are determined by the motor's power requirement in kilowatts, incurring a fixed cost per kilowatt-year. Both these charges are treated as annual cash outflows and are included in the present worth calculation using the present value annuity factor over the 10-year period. These charges significantly impact the total cost-analysis by increasing the operating cost component of the financial evaluation .
An increase in the MARR would decrease the present worth (PW) of the motor, as a higher discount rate reduces the present value of future cash inflows. The calculation of present worth involves multiplying future cash flows by a present worth factor that diminishes with a higher interest rate. This means that as MARR increases, the importance of immediate returns becomes more critical, and the PW of longer-term investments becomes less favorable .
The annual fuel expense directly contributes to the operation and maintenance costs of the gas turbine, forming a substantial portion of periodic expenditures. It is calculated by multiplying the hourly fuel cost by the total hours of operation annually. This consistent expense must be included when calculating the annual equivalent life-cycle cost, influencing the overall financial evaluation by increasing annual operating costs, hence heightening the turbine's total annualized cost, and could reduce the financial attractiveness of the turbine .
The uniform-series formula calculates the future worth (FW) of a series of equal annual savings by multiplying the annual savings by the Uniform Series Compound Amount Factor. This factor derives from the formula FW = A[(1 + i)^n - 1]/i, where A is the annual amount, i is the interest rate (MARR), and n is the number of periods. For the tax savings, this involves calculating the difference in tax amounts between two locations, determining the annual saving, and using the uniform-series formula to find the total future savings value over the 10-year period .
The dismantling and disposal costs are assessed by considering their impact on the net life-cycle expenses at the end of the turbine's useful life. These costs are treated as future cash outflows, which are then converted into an equivalent annual cost using the annuity formula over the turbine's 8-year life and discount rate (MARR). Including such end-of-life costs provides a comprehensive view of the total financial burden of the asset over its entire life, helping in making accurate total cost estimations for the investment .
When evaluating the job decision based on tax burden differences, one must consider both the current tax rates and long-term financial objectives. The annual tax saving is calculated by comparing the taxes payable in both locations. This annual saving is then projected using the future worth formula to assess its value over the desired period (10 years), considering a personal MARR as a discount factor. This allows for a comprehensive understanding of the monetary benefits of accepting the job in Cebu versus Manila, making it a critical factor in the decision-making process .
The future worth of the tax savings is calculated by determining the difference in tax burdens between Manila and Cebu on the annual salary, applying this tax saving uniformly over 10 years using a future worth annuity factor at a personal MARR of 10%. The calculated annual tax savings is Php 1,611.50 and the future worth of these savings is found using FW = A[(1 + i)^n - 1]/i, where i = 10% and n = 10 years. This results in a future worth of Php 25,683.16 .
The annual equivalent life-cycle cost of the gas turbine is calculated by first determining the total initial cost of acquisition, which includes investment and installation expenses. Then, the annual operating costs such as maintenance and fuel expenses and the end-of-life dismantling costs are considered. Using these, the formula AW = (R − E) − [P(i/(1−(1+i)−n)) − S(1/((1+i)−n−1))] adjusts for the MARR of 15%. It involves converting the initial and end-of-life costs into equivalent annual costs and combining them with the ongoing annual expenses. The negative result indicates a cost, therefore the annual equivalent life-cycle cost is Php 1,778,335.276 .