Southport Astronomics needs to purchase of new paint dryer for their aluminum te

Question

Southport Astronomics needs to purchase of new paint dryer for their aluminum telescope tubes.

- Alternative 1: Conventional Dryer will cost $95,000 and can be expected to last 5 years, with a salvage value of $10,000. Cost of electricity used will be $22,000 per year. Maintenance Cost is will be $1,000 per year. Additionally in year 3 its heating element assembly will need to be replaced at a cost of $5000.

- Alternative 2: Convection Dryer will cost $140,000 and can be expected to last 5 years, and will have a salvage value of $12,000. Cost of electricity used will be $10,000 per year. Maintenance Cost will be $1,500 per year. Additionally in year 3 its heating element assembly will need to be replaced at a cost of $10000.

Assume the services provided by the dryers are identical; assume an interest rate of 10%.

Compare the annual equivalent costs of the 2 alternatives and make a recommendation for selection.

Explanation / Answer

Alternative 1 Alternative 2 First cost $       95,000.00 $    1,40,000.00 PV of electricity cost+maintenance cost: = 23000*(1.1^5-1)/(0.1*1.1^5) = $       87,188.10 =11500*(1.1^5-1)/(0.1*1.1^5) = $       43,594.05 PV of replacement cost in year 3: = 5000/1.1^3 = $         3,756.57 = 10000/1.1^3 = $          7,513.15 PV of salvage value: = 10000/1.1^5 = $         6,209.21 = 12000/1.1^5 = $          7,451.06 Total PV $   1,92,153.88 $    1,98,558.25 Annual equivalent cost: = 192153.88*0.1*1.1^5/(1.1^5-1) = $       50,689.71 = 198558.25*0.1*1.1^5/(1.1^5-1) = $       52,379.17 RECOMMENDATION: As the EAC of Alternative 1 is lower, it is to be selected.

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