In: Operations Management
Your cat's summer kitty-cottage needs a new roof. You feel a 15-year analysis period is in line with your cat's remaining lives. (there is no salvage value for old roofs.)
Thatch Slate
First cost $200 $350
Annual upkeep 50 20
Service life, in years 3 5
A. Graph the EUAC or EUAW for the alternatives. Construct a choice table for interest rates from 0% to 100%.
B. Which roof should you choose if your MARR is 12%? What is the actual value of the IRR on the incremental cost?
A.Calculation of EUAC | |||||||||||||||||||||||||||||||
Interest rate | 1% | 2% | 3% | 4% | 5% | 6% | 7% | 8% | 9% | 10% | 11% | 12% | 13% | 14% | 15% | 16% | 17% | 18% | 19% | 20% | 21% | 22% | 23% | 24% | 25% | 26% | 27% | 28% | 29% | 30% | 31% |
Annuity factor = (1- (1/(1+interest rate)^3))/interest rate | 2.94 | 2.88 | 2.83 | 2.78 | 2.72 | 2.67 | 2.62 | 2.58 | 2.53 | 2.49 | 2.44 | 2.40 | 2.36 | 2.32 | 2.28 | 2.25 | 2.21 | 2.17 | 2.14 | 2.11 | 2.07 | 2.04 | 2.01 | 1.98 | 1.95 | 1.92 | 1.90 | 1.87 | 1.84 | 1.82 | 1.79 |
EUAC of Thatch = 200/annulty +50 | 118.00 | 119.35 | 120.71 | 122.07 | 123.44 | 124.82 | 126.21 | 127.61 | 129.01 | 130.42 | 131.84 | 133.27 | 134.70 | 136.15 | 137.60 | 139.05 | 140.51 | 141.98 | 143.46 | 144.95 | 146.44 | 147.93 | 149.43 | 150.94 | 152.46 | 153.98 | 155.51 | 157.04 | 158.58 | 160.13 | 161.68 |
Annuity factor = (1- (1/(1+interest rate)^5))/interest rate | 4.85 | 4.71 | 4.58 | 4.45 | 4.33 | 4.21 | 4.10 | 3.99 | 3.89 | 3.79 | 3.70 | 3.60 | 3.52 | 3.43 | 3.35 | 3.27 | 3.20 | 3.13 | 3.06 | 2.99 | 2.93 | 2.86 | 2.80 | 2.75 | 2.69 | 2.64 | 2.58 | 2.53 | 2.48 | 2.44 | 2.39 |
EUAC of Slate = 350/annulty factor +20 | 92.11 | 94.26 | 96.42 | 98.62 | 100.84 | 103.09 | 105.36 | 107.66 | 109.98 | 112.33 | 114.70 | 117.09 | 119.51 | 121.95 | 124.41 | 126.89 | 129.40 | 131.92 | 134.47 | 137.03 | 139.62 | 142.22 | 144.85 | 147.49 | 150.15 | 152.82 | 155.52 | 158.23 | 160.96 | 163.70 | 166.46 |
Used excel sheet, and one can do in the same manner upto 100% interest And option Slate is better option uoto interest rate of 28% and beyond Thatch is best option. |
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b. If MARR is 12 percent | |||||||||||||||||||||||||||||||
IRR of Thatch = -200 - 50(1-(1.12)^-3)/0.12 =-200 - 120.09 = -320.09 | |||||||||||||||||||||||||||||||
IRR of Slate = -350 - 20(1-(1.12)^-5)/0.12 =-350 - 72.09= -422.09 | |||||||||||||||||||||||||||||||
So option Thatch is the best option will less negative but life is three years only. | |||||||||||||||||||||||||||||||
Formula = present value of annual out flow = annual flow(( 1-(1+MARR)^-N))/MARR, where N= Life |