# Equivalent annual cost method

You are contemplating converting your car from burning gasoline to propane.

The following information is available:

Propane conversion kit (parts and labor) $750

Salvage value of kit after 5 years is $100

Kilometres travelled per year 40,000

Gasoline consumption 8 liters per 100 km.

Average gasoline price over 5 years is 0.40 cents per liter.

Annual maintenance advantage burning propane is $100

Propane is 10% cheaper and 10% more efficient.

The minimum attractive rate of return is 12%

Is the conversion justified economically?

Use equivalent annual cost method.

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#### Solution Preview

See attached Excel file.

Is the conversion justified economically?

Use equivalent annual cost method.

Conversion cost= $750

Salvage value (after 5 years)= $100

Gasoline cost per year= $1,280 =(40000/100)*8*0.4

Propane cost per year= $1,047 =(40000/(1.1*100))*8*0.4*0.9

Annual maintenance advantage= $100

Minimum attractive rate of return MARR= 12%

We first calculate the present value of costs. ...

#### Solution Summary

Uses equivalent annual cost method to evaluate the proposal to convert the car from burning gasoline to propane.