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    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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    https://brainmass.com/business/equivalent-annual-annuity/equivalent-annual-cost-method-230536

    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.

    $2.19