Question

1. You are a Facility Manager. You have a project that is desperately in need of carpet. a. This project need is 3000 Square Feet. i. A high quality carpet costs $24/Square Yard and a low quality carpet costs $18/Square Yard. ii. The high quality carpet has a life expectancy of 10 years and the low quality carpet of 7 years. iii. The labor to maintain the high quality carpet is $1000 /Year and the low quality is $800. iv. The predicted material costs for the high quality carpet is $200 /Year and the Low is $250 / Year. v. The cost of money/ escalation is 9% annually. b. What do you recommend the company buy and why? The initial requestor does not have a preference on which carpet type is selected and is looking for a recommendation based on what makes the most sense for the company.

Answer 1

Period	PV factor @9%	PVA factor @9%
1	0.91743	0.91743
2	0.84168	1.75911
3	0.77218	2.53129
4	0.70843	3.23972
5	0.64993	3.88965
6	0.59627	4.48592
7	0.54703	5.03295
8	0.50187	5.53482
9	0.46043	5.99525
10	0.42241	6.41766

Cost of high quality carpet (3000*24)			$             72,000
High quality carpet (10 Years)
	Cash flow	PV | PVA factor	Present Value
Intial cost	$         72,000	1.00000	$             72,000
Labor cost	$            1,000	6.41766	$               6,418
Material cost	$               200	6.41766	$               1,284
Total present value			$             79,701
Divided by: PVA factor @9% for 10 years			6.41766
Equivalent uniform annual cost (EUAC)			$             12,419

Cost of low quality carpet (3000*18)			$             54,000
Low quality carpet (7 Years)
	Cash flow	PV | PVA factor	Present Value
Intial cost	$         54,000	1.00000	$             54,000
Labor cost	$               800	5.03295	$               4,026
Material cost	$               250	5.03295	$               1,258
Total present value			$             59,285
Divided by: PVA factor @9% for 7 years			5.03295
Equivalent uniform annual cost (EUAC)			$             11,779

Equivalent uniform annual cost
High quality carpet			$             12,419
Low quality carpet			$             11,779

The low quality carpet would recommend. The project with lower EUAC (Equivalent Uniform Annual Cost) is better. Low quality carpet has a lower EUAC. Thus, low quality carpet would be recomanded.