An airline is considering two types of engine systems for use in its planes: System A costs
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An airline is considering two types of engine systems for use in its planes:
- System A costs $100,000 and uses 40,000 gallons of fuel per 1,000 hours of operation at the average load encountered in passenger service.
- System B costs $200,000 and uses 32,000 gallons of fuel per 1,000 hours of operation at the average load encountered in passenger service.
Both engine systems have the same life and the same maintenance and repair record, and both have a three-year life before any major overhaul is required. Each system has a salvage value of 10% of the initial investment. If jet fuel costs $4.80 per gallon currently and fuel consumption is expected to increase at the rate of 6% per year because of degrading engine efficiency, which engine system should the firm install? Assume 2,000 hours of operation per year and an MARR of 10%. Use the AE criterion. What is the equivalent operating cost per hour for each engine?
Salvage ValueSalvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...
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