You are part of a team preparing a bid for a civil engineering project. The proj
ID: 1094477 • Letter: Y
Question
You are part of a team preparing a bid for a civil engineering project. The project requires that a roadcut be completed for which approximately 1,000,000 tons of rock and soil must be removed over a period of four years. Regardless of the alternative selected, the rock and soil removal will require four years to complete. You have been asked to compare the costs of using two different items of equipment so that the lower cost alternative may be chosen. Using the data below, recommend the lower cost choice. Note that the life of the Model 5237 Rock Raptor is two years, while that of the Model 4389 Big Bite is four years. Use an Annual Equivalent Cost (AEC) analysis to support your answer. (Use MARR = 10%)
(a) Draw an appropriate cash flow diagram for each alternative to cover the four-year analysis period.
(b) Indicate the formulas and factors used to evaluate the cash flow diagrams.
(c) Perform the calculations and indicate your results. Which alternative do you recommend and why?
Element of cost Model 5237 Rock Raptor Model 4389 Big Bite Initial equipment investment $200,000 $500,000 Annual operating costs $60,000 $35,000 Annual repair costs $20,000 $10,000 Salvage value at 2 years $50,000 Salvage value at 4 years $60,000
(a) Draw an appropriate cash flow diagram for each alternative to cover the four-year analysis period.
(b) Indicate the formulas and factors used to evaluate the cash flow diagrams.
(c) Perform the calculations and indicate your results. Which alternative do you recommend and why?
Explanation / Answer
(a) Draw an appropriate cash flow diagram for each alternative to cover the four-year analysis period.
Model 5237 Rock
T = 0 T = 1 T = 2 T = 3 T = 4
Cost = -$200,000 80,000 230,000 80,000 30,000
PVCF = -$200,000 72,727 190,083 60,105 20,490
NPV = $543,406
Model 4389 Big Bite
T = 0 T = 1 T = 2 T = 3 T = 4
Cost = -$500,000 45,000 45,000 45,000 -15,000
PVCF = -$5,000,000 40,909 37,190 33,809 -10,245
NPV = $601,663
(b) Indicate the formulas and factors used to evaluate the cash flow diagrams.
The following formulas and factors used to evaluate the cash flow diagrams.
Initial equipment investment
Annual operating costs
Annual repair costs
Salvage value
Annual costs = operating cost+ repair cost
PV of cost in year N = cost in year N / (1.10)N
(c) Perform the calculations and indicate your results. Which alternative do you recommend and why?
Model 5237 Rock
Annual costs = 60,000 + 20,000 = 80,000
Salvage value at year 2 and 4= 50,000
Cost at year 2: 80,000 + 200,000
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