CASE STUDY ANNUAL WORTH ANALYSIS-THEN AND NOW Background and Information Harry, owner of an automobile battery distributorship in Atlanta, Georgia, performed an economic analysis 3 years ago when he decided to place surge protectors in-line for all his major pieces of testing equipment. The estimates used and the annual worth analysis at MARR = 15% are summarized below. Two different manufacturers protectors were compared. Powru Lloyd's - 36,000 -26,000 Cost and installation. S Annual maintenance cost, Sper year Salvage values Equipment repair savings. S Useful life years -800 2.000 25.000 6 --300 3.000 35.000 10 The spreadsheet in Figure 6-9 is the one Harry used to make the decision. Lloyd's was the clear choice due to its substantially larger AW value. The Lloyd's protectors were installed. MARR = 15% 1 Powrup Investment Annual and salvage maintenance -26,000 0 0 -800 0 -800 -800 0 -800 0 -800 2.000 Repair Savings 0 25,000 25,000 25,000 25,000 25,000 25,000 3 4 5 Year 6 0 7 8 2 9 10 4 11 5 12 6 13 7 14 8 15 9 16 10 17 AW element 18 Total AW Figure 6-9 0 0 Lloyd's Investment Annus and salvage maintenance -36,000 0 0 -300 0 -300 -300 0 -300 -300 -300 -300 0 -300 0 3.000 300 -7,025 Repair savings 0 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35.000 $ 27,675 o 300 -6,542 -800 25,000 $ 17,558 Annual worth analysis of surge protector alternatives, case study. During a quick review this last year (year 3 of operation), it was obvious that the maintenance costs and repair savings have not followed (and will not follow) the estimates made 3 years ago. In fact, the maintenance contract cost (which includes quarterly inspection) is going from $300 to $1200 per year next year and will then increase 10% per year for the next 10 years. Also, the repair savings for the last 3 years were $35,000, $32,000, and $28,000, as best as Harry can determine. He believes savings will decrease by $2000 per year hereafter. Finally, these 3-year-old protectors are worth nothing on the market now, so the salvage in 7 years is zero, not $3000. Case Study Exercises 1. Plot a graph of the newly estimated maintenance costs and repair savings projections, assuming the protectors last for seven more years. 2. With these new estimates, what is the recalculated AW for the Lloyd's protectors? Use the old first cost and maintenance cost estimates for the first 3 years. If these estimates had been made 3 years ago, would Lloyd's still have been the economic choice? 3. How has the capital recovery amount changed for the Lloyd's protectors with these new estimates? You have to draw a new cash flow diagram for the Lloyd's option Solve it for Total AW Compare it with other option and take a decision and comment on it Try to answer three questions given in the case study CASE STUDY ANNUAL WORTH ANALYSIS-THEN AND NOW Background and Information Harry, owner of an automobile battery distributorship in Atlanta, Georgia, performed an economic analysis 3 years ago when he decided to place surge protectors in-line for all his major pieces of testing equipment. The estimates used and the annual worth analysis at MARR = 15% are summarized below. Two different manufacturers protectors were compared. Powru Lloyd's - 36,000 -26,000 Cost and installation. S Annual maintenance cost, Sper year Salvage values Equipment repair savings. S Useful life years -800 2.000 25.000 6 --300 3.000 35.000 10 The spreadsheet in Figure 6-9 is the one Harry used to make the decision. Lloyd's was the clear choice due to its substantially larger AW value. The Lloyd's protectors were installed. MARR = 15% 1 Powrup Investment Annual and salvage maintenance -26,000 0 0 -800 0 -800 -800 0 -800 0 -800 2.000 Repair Savings 0 25,000 25,000 25,000 25,000 25,000 25,000 3 4 5 Year 6 0 7 8 2 9 10 4 11 5 12 6 13 7 14 8 15 9 16 10 17 AW element 18 Total AW Figure 6-9 0 0 Lloyd's Investment Annus and salvage maintenance -36,000 0 0 -300 0 -300 -300 0 -300 -300 -300 -300 0 -300 0 3.000 300 -7,025 Repair savings 0 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35.000 $ 27,675 o 300 -6,542 -800 25,000 $ 17,558 Annual worth analysis of surge protector alternatives, case study. During a quick review this last year (year 3 of operation), it was obvious that the maintenance costs and repair savings have not followed (and will not follow) the estimates made 3 years ago. In fact, the maintenance contract cost (which includes quarterly inspection) is going from $300 to $1200 per year next year and will then increase 10% per year for the next 10 years. Also, the repair savings for the last 3 years were $35,000, $32,000, and $28,000, as best as Harry can determine. He believes savings will decrease by $2000 per year hereafter. Finally, these 3-year-old protectors are worth nothing on the market now, so the salvage in 7 years is zero, not $3000. Case Study Exercises 1. Plot a graph of the newly estimated maintenance costs and repair savings projections, assuming the protectors last for seven more years. 2. With these new estimates, what is the recalculated AW for the Lloyd's protectors? Use the old first cost and maintenance cost estimates for the first 3 years. If these estimates had been made 3 years ago, would Lloyd's still have been the economic choice? 3. How has the capital recovery amount changed for the Lloyd's protectors with these new estimates? You have to draw a new cash flow diagram for the Lloyd's option Solve it for Total AW Compare it with other option and take a decision and comment on it Try to answer three questions given in the case study