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# Alternative and Equivalent Annual Cost Method

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The breeching on No. 2 boiler needs to be replaced because of severe corrosion.

Two alternatives are considered:

-replace with steel according to original specifications.

-replace with F.R.P.

You have obtained the following estimates:

Cost of breeching STEEL \$15000
Cost of breeching F.R.P. \$18000

Installation cost for STEEL \$8000
Installation cost for F.R.P. \$6000

Changes to steel supports for STEEL zero
Changes to steel supports for F.R.P. \$3000

Life span of STEEL is 6 years
Life span of F.R.P. is 12 years

Annual maintenance for STEEL is \$1200
Annual maintenance for F.R.P. is zero

Minimum attractive rate of return is 12%

Use equivalent annual cost method.

Which alternative would you select?

#### Solution Preview

In equivalent annual cost (EAC) method, we find the present value of all the costs and then convert this present value to an annuity which has the same present value. The annuity amount is called as equivalent annual cost (EAC).
STEEL
The initial cost is ...

#### Solution Summary

The solution explains the use of equivalent annual cost method in selecting between two alternatives

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