Compare the equivalent uniform annual costs of service for two emergency power p

Question

Compare the equivalent uniform annual costs of service for two emergency power plants. Unit A has a first cost of $40,000, and expected life of 8 years, and no net salvage value. Annual disbursements for operation and maintenance are expected to be $1,800. Unit B has a first cost of $50,000, an expected 10-year life, and an estimated net salvage value of $5,000. Annual operation and maintenance is expected to be $1,200. If unit B is chosen, an additional annual income tax payment of $440 will be required. Use an i* of 25% after income taxes.

Explanation / Answer

Equivalent Uniform Annual Cost (EUAC) are computed as follows.

EUAC, Unit A ($) = 40,000 x A/P(25%, 8) + 1,800 = 40,000 x 0.3004** + 1,800 = 12,016 + 1,800 = 13,816

For Unit B, Total annual cost ($) = Operation expense + Income tax = 1,200 + 440 = 1,640

EUAC, Unit B ($) = 50,000 x A/P(25%, 10) + 1,640 - 5,000 x P/F(25%, 8) x A/P(25%, 8)

= 50,000 x 0.2801** + 1,640 - 5,000 x 0.1678** x 0.2801**= 14,005 + 1,640 - 235 = 15,410

**From A/P & P/F Factor tables

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