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Annual Equivalent Cost; Oven Case Study

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Synta Manufacturing Company is considering purchase of new oven to dry its painted optical tube assemblies.

Alternative 1: Conventional oven will cost $100,000 and can be expected to last 5 years, with a salvage value of $10,000. Operating costs will be $24,000 per year. •

Alternative 2: Convection oven will cost $140,000, should last 5 years, and will have a salvage value of $12,000. The operating costs will be $12,000 per year.

Assume the services provided by the ovens are identical. Assume an interest rate of 10%
a) Compare the annual equivalent costs of the 2 alternatives.
b) Make a recommendation for selection.

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Solution Summary

This solution provides detailed step-wise calculations to an engineering economics problem.

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Annual equivalent cost or annual worth (AW) is the annual cost of owning an asset over its
entire life. It is often used by firms for capital budgeting decisions.

This is how you calculate AW:

Alternative 1
Capital Recovery (CR) = - $100,000 (A/P, 10%, 5) + $10,000 (A/F, 10%, 5)
where A = ...

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  • "Thankyou for the feedback. I have a few question though; With the first statistic about cost below... “According to Sigma-Aldrich catalog, cost of 1L octane is AUD $ 392.00, whereas the cost of 1L ethanol is AUD $196.00. Moreover, if ethanol is obtained from sugar industry as a by-product, it may cost even less. Source of oxygen is ambient atmosphere, so it costs nothing. So ethanol is much cheaper than petrol, in fact it is half-priced: AUD $ (392-196) = $ 196.” I didn't think it made sense because the cost of petrol per litre is normally a dollar something or even less than a dollar not a couple of hundred of dollars. For example, a statistic that I found in america was: "U.S. ethanol production costs are about $1.20 per gallon of ethanol, or $1.82 per gallon on a gasoline-equivalent basis." However, I was wondering whether you could find an Australian statistic. Also, you mentioned that H20 is not a greenhouse gas. However, in the combustion equations it is actually carbon dioxide and water vapour which are produced and they are both greenhouse gases. Finally, how do I calculate the energy efficiency of ethanol and petrol? "
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