1. Annual Equivalent Worth Criterion Lecture No.17 Professor C. S. Park Fundamentals of Engineering Economics Copyright © 2005

2. Which Brand Would you Pick? Brand A Brand B $55/Year$85/Year $799 $699 How Would you calculate the hourly operating cost?

3. Chapter 6 Annual Equivalence Analysis  Annual equivalent criterion  Applying annual worth analysis  Mutually exclusive projects

4. Chapter Opening Story Capstone Turbine Corporation Manufacturer of micro- turbine (mini-Power Plant) At Issue: Economics of MicroCHP

5. Annual Worth Analysis Principle: Measure an investment worth on annual basis Benefit: By knowing the annual equivalent worth, we can: Seek consistency of report format Determine the unit cost (or unit profit) Facilitate the unequal project life comparison

6. Example 6.1 Computing Equivalent Annual Worth $15 $3.5 $5 $12 $8 0 2 3 4 5 6 1 A = $1.835 2 3 4 5 6 1 AE(12%) = $6.946(A/P, 15%, 6) = $1.835 $6.946 0 0 PW(15%) = $6.946 $9.0 $10

7. Annual Equivalent Worth - Repeating Cash Flow Cycles $500 $700 $800 $400 $500 $700 $800 $400 $1,000 Repeating cycle

8. First Cycle: PW(10%) = -$1,000 + $500 (P/F, 10%, 1) +... + $400 (P/F, 10%, 5) = $1,155.68 AE(10%) = $1,155.68 (A/P, 10%, 5) = $304.87 Both Cycles: PW(10%) = $1,155.68 + $1,155.68 (P/F, 10%, 5) +... + $400 (P/F, 10%, 5) = $1,873.27 AE(10%) = $1,873.27 (A/P, 10%,10) = $304.87

9. Annual Equivalent Cost When only costs are involved, the AE method is called the annual equivalent cost. Revenues must cover two kinds of costs: Operating costs and capital costs. Capital costs Operating costs + Annual Equivalent Costs

10. Capital (Ownership) Costs Def: Owning an equipment is associated with two transactions—(1) its initial cost (I) and (2) its salvage value (S). Capital costs: Taking these items into consideration, we calculate the capital costs as: 0 1 2 3 N 0 N I S CR(i)

11. VehicleValue after three years Monthly lease Acura MDX 4WD$21,400588 Toyota 4Runner 4WD 4-door Limited (with moonroof) $18,750646 Lexus RX300 2 WD$18,750651 GMC Envoy 4WD 4door SLT (with Bose audio, CD changer and moonroof) $15,050733 Mitsubishi Montero 4WD 4 door Limited $15,225743 Ford Explorer 4WD 4-door Eddie Bauer edition (with moonroof, rear air and third seat) $14,425754 Isuzu Trooper 4WD 4-door Limited $11,675823 Source: Automotive Lease Guide

12. SEGMENTBEST MODELSASKING PRICE PRICE AFTER 3 YEARS Compact carMini Cooper$19,800$12,078 Midsize carVolkswagen Passat $28,872$15,013 Sports carPorsche 911$87,500$48,125 Near luxury carBMW 3 Series$39,257$20,806 Luxury carMercedes CLK$51,275$30,765 MinivanHonda Odyssey $26,876$15,051 Subcompact SUVHonda CR-V$20,540$10,681 Compact SUVAcura MDX$37,500$21,375 Full size SUVToyota Sequoia$37,842$18,921 Compact truckToyota Tacoma$21,200$10,812 Full size truckToyota Tundra$25,653$13,083

13. Example - Capital Cost Calculation for Mini Cooper Given: I = $19,800 N = 3 years S = $12,078 i = 6% Find: CR(6%) $19,800 $12,078 3 0

14. Example 6.2