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CASE STUDY 1 THE CHANGING SCENE OF AN ANNUAL WORTH ANALYSIS 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. Powr Up Lloyd's Cost and Installation, -26,000 - 36.000 Annual maintenance cost - 800 --300 $ per year Salvage value, $ 2,000 3,000 Equipment repair savings, $ 25,000 35,000 Useful life, yo years 6 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. 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 7 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? ON 1 MARR 15% 2 3 PowrUp 4 Investment Annual Repair 5 Year and salvage maintenance savings 6 -26,000 0 0 7 0 -800 25,000 8 -800 25,000 9 3 -800 25,000 10 4 -800 25,000 11 5 -800 25,000 12 6 2,000 -800 25,000 13 7 14 8 15 9 16 10 17 AW element -6,642 -800 25,000 18 Total AW $ 17,558 Figure 6-9 Annual worth analysis of surge protector alternatives, case study. Lloyd's Investment Annual Repair and salvage maintenance savings -36,000 0 0 0 -300 35,000 0 -300 35,000 0 -300 35,000 0 -300 35,000 0 -300 35,000 0 -300 35,000 0 -300 35,000 0 -300 35,000 0 -300 35,000 3,000 -300 35,000 -7,025 -300 35,000 $ 27,675