Question

A certain medical device will result in an estimated $70,000 reduction in hospital labor expenses during the beginning of first and second years of operation. Additional operating expenses for the device (maintenance, electric power, etc.) are $3,200 annually, and they increase by $150 per year. It is anticipated that the device will last for 12 years and will have no market value at that time. If the MARR is 10% per year draw and calculate the AW of the project. Explain your results.

Answer 1

Calculation of AW of the Project when MARR is 10% for the coming 12 years.

Year	Expense	MARR @10%	PV of Exp	Reduction in Exp	PV of Inc
0	0	1	0	35000	35,000
1	3200	0.9091	2,909	35000	31,818
2	3350	0.8264	2,769	-	-
3	3500	0.7513	2,630	-	-
4	3650	0.6830	2,493	-	-
5	3800	0.6209	2,360	-	-
6	3950	0.5645	2,230	-	-
7	4100	0.5132	2,104	-	-
8	4250	0.4665	1,983	-	-
9	4400	0.4241	1,866	-	-
10	4550	0.3855	1,754	-	-
11	4700	0.3505	1,647	-	-
12	4850	0.3186	1,545	-	-
			26,289		66,818

Because of Medical device:

There is reduction of Operating expense of $ 66,818

Additional Expense incurred = $ 26,289 /-

AW of the project = Additional Savings - Additional expenses incurred becasue of such medical device

= 66,818 - 26,289 = $ 40,529