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64 views2 pages

Sheet 7

Uploaded by

Amany Sobhy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Benha University Department: Mechanical Engineering

Benha Faculty of Engineering Code: M 1482


Subject : Economy Sheet 7

1- One of the four ovens at a bakery is being considered for replacement. Its salvage value and
maintenance costs are given in the table below for several years. A new oven costs $80,000 and
this price includes a complete guarantee of the maintenance costs for the first two years, and it
covers a good proportion of the maintenance costs for years 3 and 4. The salvage value and
maintenance costs are also summarized in the table.

Old Oven New Oven


Salvage Value Maintenance Salvage Value Maintenance
Year at End of Year Costs at End of Year Costs
0 $20,000 $ - $80,000 $ -
1 17,000 9,500 75,000 0
2 14,000 9,600 70,000 0
3 11,000 9,700 66,000 1,000
4 7,000 9,800 62,000 3,000

Both the old and new ovens have similar productivities and energy costs. Should the oven bereplaced
this year, if the MARR equals 10%?

2- The cash flow diagram below indicates the costs associated with a piece of equipment. The
investment cost is $5,000 and there is no salvage. During the first 3 years the equipment is under
warranty so there are no maintenance costs. Then the estimated maintenance costs over 15 years
follow the pattern shown in the cash flow diagram. Determine the equivalent annual cost (EAC)
for n = 12 if the minimum attractive rate of return (MARR) = 15%. Use gradient and uniform series
factors in your solution.
3- A hospital is considering purchasing a new $40,000 diagnostic machine that will have no salvage
value after installation, as the cost of removal equals any sale value. Maintenance is estimated to
be $2,000 per year as long as the machine is owned. After ten years the radioactive ion source will
have caused sufficient damage to machine components that safe operation is no longer
possible and the machine must be scrapped. The most economic life of this machine is

a. One year since it will have no salvage after installation.


b. Ten years because maintenance doesn’t increase.
c. Less than ten years but more information is needed to determine the economic life.

4- A petroleum company, whose minimum attractive rate of return is 10%, needs to paint the vessels
and pipes in its refinery periodically to prevent rust. “Tuff-Coat”, a durable paint, can bepurchased
for $8.05 a gallon while “Quick-Cover”, a less durable paint, costs $3.25 a gallon. The labor cost
of applying a gallon of paint is $6.00. Both paints are equally easy to apply and will cover the same
area per gallon. Quick-Cover is expected to last 5 years. How long must Tuff- Coat promise to
last to justify its use?
5- Ten years ago Hyway Robbery, Inc. installed a conveyor system for $8,000. The conveyor system
has been fully depreciated to a zero salvage value. The company is considering replacing the
conveyor because maintenance costs have been increasing. The estimated end-of-year
maintenance costs for the next five years are as follow:
Year Maintenance
1 $1,000
2 1,250
3 1,500
4 1,750
5 2,000

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Benha University Department: Mechanical Engineering
Benha Faculty of Engineering Code: M 1482
Subject : Economy Sheet 7

6- Ten years ago, the Cool Chemical Company installed a heat exchanger in its plant for $10,000.
The company is considering replacing the heat exchanger because maintenance costs have been
increasing. The estimated maintenance costs for the next 5 years are as follow:

Year Maintenance
1 $1,000
2 1,200
3 1,400
4 1,600
5 1,800

Whenever the heat exchanger is replaced, the cost of removal will be $1,500 more than the heat
exchanger is worth as scrap metal. The replacement the company is considering has an equivalent
annual cost (EAC) = $900 at its most economic life. Should the heat exchanger be replaced now if
the company’s minimum attractive rate of return (MARR) is 20%?

7- A graduate of an engineering economy course has complied the following set of estimated costs
and salvage values for a proposed machine with a first cost of $15,000; however, he has forgotten
how to find the most economic life. Your task is to show him how to do this by calculating the
equivalent annual cost (EAC) for n = 8, if the minimum attractive rate of return (MARR) is 15%.

Life (n) Estimated End-of-Year Estimated Salvage


Years Maintenance if Sold in Year n
1 $ 0 $10,000
2 $ 0 9,000
3 300 8,000
4 300 7,000
5 800 6,000
6 1,300 5,000
7 1,800 4,000
8 2,300 3,000
9 2,800 2,000
10 3,300 1,000

Remember: Calculate only one EAC (for n = 8). You are not expected to actually find the most economical
life.

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