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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?

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    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).
    The initial cost is ...

    Solution Summary

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