In the course of a recent survey of McLeod Manufacturers\' productive capacity,
ID: 2726001 • Letter: I
Question
In the course of a recent survey of McLeod Manufacturers' productive capacity, you were asked to indicate some of the options for one of its boilers and advise which would be most cost effective, assuming an indefinitely long time horizon. Essentially the choices were: the 'status quo', that is no change; upgrade; and, replace. The data for the replacement are based on the assumption of repeatability, and the model of the boiler chosen would operate at its minimum Equivalent Annual Cost over its lifetime. The data below are the end-year cost implications of each of the three options identified over the next six years, all expressed in constant base year zero prices. In the evaluation of options, you have been told that McLeod's Minimum Attractive Rate of Return in constant prices [MARR=i_r] is 0.10 per annum. What option/combination of options would cost least over the six year period?Explanation / Answer
The option with least present value will be selected. The present value is to be clculated at MARR 10%.
Status Quo :
Present Value = 2000/1.1 + 2500/1.1^2 + 3000/1.1^3 + 3500/1.1^4 + 4000/1.1^5 + 4500/1.1^6
= $13,552.61
Upgrade :
Present Value = 6000 + 500/1.1 + 500/1.1^2 + 800/1.1^3 + 1000/1.1^4 + 1500/1.1^5 + 2000/1.1^6
= $10,212.16
Replace :
Present Value = 4000/1.1 + 4000/1.1^2 + 4000/1.1^3 + 4000/1.1^4 + 4000/1.1^5 + 4000/1.1^6
= $17,421.04
So, Upgrading is the best option for the boiler as it has the lowest cost over the time period.