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Annual Equivalent Cost; Oven Case Study

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.

Solution Preview

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 = ...

Solution Summary

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