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Engineering Economy

GEN200
Section 51
Date of Submission: May 30th, 2016
Submitted to: Dr. Samer Al Martini

CASE STUDY 1
THE CHANGING SCENE OF AN ANNUAL WORTH ANALYSIS

[ Group Project]

Done by:
Ahlam Al Hindwan 1039826
Eqbal Ahmed Amer 1037661
Yasmin Aldakak 1037417
Yasra Saeed Ahmad 1045630
Rahma Mohamed 1045481

Abstract
Engineering Economy is a subset of economics for application to engineering
projects where engineers seek solutions to problems, and the economic
viability of each potential solution is normally considered along with the
technical aspects. Our group project is about the changing scene of an
annual worth analysis. The case study problem discusses about an owner of an
automobile battery distributorship wanting to estimate maintenance costs and repair savings
projections for the next seven years.

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Table of content

Introduction:
.........................................................................................................................4

Discussion:.......................................................................................................5

Conclusion:....................................................................................................10

References: ...................................................................................................11

Appendix:

. 12

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Introduction

This economy project shows the changing scene of annual worth analysis. The Annual Worth

method evaluates the required alternative as an equal annual series of cash flows while

studying the period. Basically, it looks at the annualequivalent of all the cash flows

of an alternative.

This case study talks about Harry, he is an owner of an automobile battery distributorship in

Atlanta, Georgia, he performed an analysis 3 years ago when he decided to place surge protectors

in-line for all his major pieces of testing equipment.

In order to solve this case study, we will go through multiple steps to achieve the desired values.

First we have to make spreadsheet to find the value of the new estimates of Lloyd's protectors.

The second step is plotting a graph of the new estimates of Lloyd's protectors. Another step is to

find the recalculated annual worth for the Lloyds protectors by using the old first cost and

maintenance cost estimates for the first 3 years. Finally, we have to evaluate how the capital

recovery amount changed for the Lloyds protectors with these new estimates.

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Discussion

Our Case Study problem is as follows:


THE CHANGING SCENE OF AN ANNUAL WORTH ANALYSIS

Background and Information


Harry, owner of an automobile battery distributorship in
Atlanta, Georgia, performed an economic analysis 3 years ago when he decided to place surge protectors
in-line for all his major pieces of testing equipment. The estimates used and the annual worth analysis at
MARR = 15% are summarized below. Two different manufacturers protectors were compared.

The spreadsheet in Figure 69 is the one Harry used to make the decision. Lloyds was the clear choice
due to its substantially larger AW value. The Lloyds protectors were installed.

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During a quick review this last year (year 3 of operation), it was obvious that the maintenance
costs and repair savings have not followed (and will not follow) the estimates made 3 years ago. In fact,
the maintenance contract cost (which includes quarterly inspection) is going from $300 to $1200 per year
next year and will then increase 10% per year for the next 10 years. Also, the repair savings for the last 3
years were $35,000, $32,000, and $28,000, as best as Harry can determine. He believes savings will
decrease by $2000 per year hereafter. Finally, these 3-year-old protectors are worth nothing on the market
now, so the salvage in 7 years is zero, not $3000.

Case Study Exercises


1. Plot a graph of the newly estimated maintenance costs and repair savings projections, assuming the
protectors last for 7 more years.
2. With these new estimates, what is the recalculated AW for the Lloyds protectors? Use the old first cost
and maintenance cost estimates for the first 3 years. If these estimates had been made 3 years ago,
would Lloyds still have been the economic choice?
3. How has the capital recovery amount changed for the Lloyds protectors with these new estimates?

Solution:
Compared to the present worth, future worth, and rate of return analysis, the

annual worth method is most preferred when discussing engineering

economics case studies. The AW concept can be easily grasped by a person

with a significant amount of knowledge about annual amounts, such as

dirhams per year. It is also because the equivalent annual worth of the

estimated receipts and disbursements throughout a life cycle of an operation

or its alternative are known as the AW value. For n number of years, the AW

value can refereed to the economic equivalent of the PW and FW values

found at a specific MARR (Blank, 2012). Moreover, we have learnt that the

AW for one life cycle is the same for all life cycles, making our calculations

easy.

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In part 1 of the case study, it asked for newer estimated maintenance and

repair costs in comparison with the old spreadsheet [Fig 6-9]. By using excel,

we came upon these assumptions and results below:

1. As it shown above, in our Excel Spreadsheet, we calculated the new

estimates of Lloyd's protectors using the spreadsheet table.

Firstly, the investment value -36000 $ and the salvage value became zero

after the third year. Thus, the AW of investment and salvage is = -36000

(A/P, 15%, 10) = -7173 $ per year.

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Secondly, the annual maintenance cost was -300 $ in the first 3 years

and then it became -1200 $ in the fourth year and it increased by 10%

thereafter.

Therefore, The AW of maintenance cost = [-300(P/A, 15%, 3)-

1200(P/A, 10%, 15%, 7) (P/F, 15%, 3)] (A/P, 15%, 10) = -977.2 $

per year.

Thirdly, the repair savings in the first year was 35000 $, then 32000 $ in

the second year, and 28000 $ in year 3 and it decreases by 2000 $

thereafter, so the total AW of repair saving is = {35000 (P/F, 15%,1) +

32000(P/F, 15%, 2) + [28000(P/A, 15%, 8) 2000(P/G, 15%,

8)] (P/F, 15%, 2)} (A/P, 15%, 10) = 26054 $ per year.

Moreover, the annual worth of Lloyd's new estimates in each year is

equal to subtracting the maintenance cost from the repair savings. In

addition, we plotted a graph of the new estimates of Lloyd's protectors as

it shown in the chart below.

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2. Considering the changes in the maintenance cost and repair savings as

they have not followed the estimates made 3 years ago, we had to calculate the new estimates

keeping in mind that the first cost that was used was the same as the old estimates, as well as,

the maintenance cost estimates for the first 3 years. The new estimated annual worth for the

Lloyds protectors can be evaluated by calculating the sum of the annual worth of investment

& salvage, annual maintenance and repair savings. The result is equal to: - 7173

977.2 + 26054 = $ 17,904. Hence, the new estimated annual worth is

$17,904 that is slightly larger than the PowrUp annual worth of $17,732.

Therefore, the Lloyds protectors should be chosen as the optimal choice.

Moreover, if these estimates were made 3 years ago, compared to the

PowrUp estimates of $17,558, they would still be the more economic

choice as it is greater in value.

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3. Capital recovery (CR) is the equivalent annual amount that an asset,

process, or system must earn each year to just recover the first cost and a

stated rate of return over its expected life. Salvage value is considered

when calculating CR. (Blank, 2012) The capital recovery (the investment

and salvage in our case) for the Lloyds protectors changed from a value

of $7-025 to an increase up to $-7173.

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Conclusion
In brief, since the objective of this case study is to
payless and profit more using the annual worth and
capital recovery calculations. It can be said that Harrys
decision is still right by choosing Lloyds protector over
power up even after the new estimation. In fact the
annual worth of Lloyds protector is higher than power up
as shown in the calculations and graphs done previously.
Besides the capital recovery calculation proves the same
fact, although it did slightly increase in the new
estimation.

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References

Blank, L. (2012). Engineering Economy. New York: McGraw-Hill.

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Appendix:

A - Excel Spreadsheet:

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B - Graph:

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