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