In: Economics
Two insulation thickness alternatives have been proposed for a process steam line subject to severe weather conditions. One alternative must be selected. Estimated savings in heat loss and installation cost are given below:
Thickness |
Installation cost |
Annual savings |
Maintenace once in each 2 years |
2cm |
$222000 |
$80000 |
$3400 |
5cm |
$360000 |
$151000 |
0 |
a.) Useful lives of both alternatives are 6 years. Which thickness would you recommend for a MARR= 9% per year and negligible market (salvage) values using Annual Worth Analysis?
b.) Useful life of 2 cm Thickness alternative is 6 years and useful life of 5 cm thickness alternative is 9 years. Which thickness would you recommend for a MARR= 9% per year and negligible market (salvage) values using Annual Worth Analysis? (Use repeatability assumption)
in excel both questions
Using Excel
interest rate | 9% | |
a. | For 2 cm thickness | |
Installation cost | -222000 | |
Annual savings | 80000 | |
Maint (every 2 yrs) | -3400.00 | |
Life | 6 | |
Present worth | 131603.13 | |
Annual Worth | 29,336.94 | |
For 5 cm thickness | ||
Installation cost | -360000 | |
Annual savings | 151000 | |
Maint (every 2 yrs) | 0.00 | |
Life | 6 | |
Present worth | 317373.71 | |
Annual Worth | 70,748.88 | |
As AW of 5 cm thickness is more, it should be selected | ||
interest rate | 9% | |
b. | For 2 cm thickness | |
Installation cost | -222000 | |
Annual savings | 80000 | |
Maint (every 2 yrs) | -3400.00 | |
Life | 6 | |
Present worth | 131603.13 | |
Annual Worth | 29,336.94 | |
For 5 cm thickness | ||
Installation cost | -360000 | |
Annual savings | 151000 | |
Maint (every 2 yrs) | 0.00 | |
Life | 9 | |
Present worth | 545282.28 | |
Annual Worth | 90,952.43 | |
As AW of 5 cm thickness is more, it should be selected |
Showing formula in Excel
interest rate | 0.09 | |
a. | For 2 cm thickness | |
Installation cost | -222000 | |
Annual savings | 80000 | |
Maint (every 2 yrs) | -3400 | |
Life | 6 | |
Present worth | =C3+PV(C1,C6,-C4)+PV(C1,2,,-C5)+PV(C1,4,,-C5) | |
Annual Worth | =PMT(C1,C6,-C7) | |
For 5 cm thickness | ||
Installation cost | -360000 | |
Annual savings | 151000 | |
Maint (every 2 yrs) | 0 | |
Life | 6 | |
Present worth | =C11+PV(C1,C14,-C12) | |
Annual Worth | =PMT(C1,C14,-C15) | |
As AW of 5 cm thickness is more, it should be selected | ||
interest rate | 0.09 | |
b. | For 2 cm thickness | |
Installation cost | -222000 | |
Annual savings | 80000 | |
Maint (every 2 yrs) | -3400 | |
Life | 6 | |
Present worth | =C21+PV(C19,C24,-C22)+PV(C19,2,,-C23)+PV(C19,4,,-C23) | |
Annual Worth | =PMT(C19,C24,-C25) | |
For 5 cm thickness | ||
Installation cost | -360000 | |
Annual savings | 151000 | |
Maint (every 2 yrs) | 0 | |
Life | 9 | |
Present worth | =C29+PV(C19,C32,-C30) | |
Annual Worth | =PMT(C19,C32,-C33) | |
As AW of 5 cm thickness is more, it should be selected |