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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.

#### 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

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.

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## Alternative and Equivalent Annual Cost Method

Can you help me get started with this assignment?

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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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