Question

The New York City subway station needs a modern transport solution for accessing a busy maintenance depot that services the L train. A second-hand system will cost $60,000; a new system will cost \$135,000. Both systems have a useful life of 6 years. The market value of the used system is expected to be $45,000 at the end of the useful lifetime, whereas the market value of the new system is anticipated to be $55,000 in 6 years. Current maintenance activity will require the used system to be operated 7 hours per day for 25 days per month. The new system with improved technology can decrease labor hours by 17%, compared to the used system. If labor costs $35 per hour and the MARR is 1% per month, calculate the difference between the annual worth of the used system and the new system (e.g., AW(Used System) – AW (New System)). If you believe the new system has a greater worth than the used system, this would be a negative number; if you believe the used system has greater worth, this would be a positive number. Report your answer to the nearest dollar.

Answer 1

Net Present Value (NPV) means Inflow - Outflow. But in this there are only outflows.

Therefore, NPV for both system is as follows:-

Used System - ($ 1,823,517.60)

New System - ($ 1,589,778.12)

Formula for Equivalent Annual Cost (EAC) =

Therefore, difference between the annual worth of the used system and the new system is as follows:-

= ($443,526.38) - ($386,674.92) = ($56,851.46)

Therefore, New system has a greater worth than the Used system.

Logically, EAC for the New system is less than that of Used system so New System is always preferable over Used system in this case.