Question

A major hospital can purchase and install a used chiller unit for $192k. This unit could be in service for five more years, after which another used chiller could replace it. The alternative is to purchase a new unit having a ten year life for $360k. . The used chiller will have a scrap value of $20k at end of life. O&M costs for the used chiller are expected to be $40k next year, increasing by S10k every year thereafter, . For the new chiller the figure is $30k scrap at end of life. The anticipated O&M costs for the new chiller are $10k in year two, with a $5k annual increment thereafter. The hospital's MARR is 4% annually. Write a memorandum in which you recommend a course of action, supported by economic calculations in an attachment.

Answer 1

YEARS	PARTICULARS	PVF	USED CHILLER ($ IN ‘000)	P.V. OF USED CHILLER CASHFLOW ($ in '000)	NEW CHILLER ($ IN ‘000)	P.V. OF NEW CHILLER CASHFLOW ($ in ' 000)
1	Initial cash outflow	1	192	192	360	360
2	O&M cost	0.9615	40	38.46	10	9.615
3	O&M cost	0.9246	50	46.23	15	13.869
4	O&M cost	0.8889	60	53.334	20	17.778
5	O&M cost	0.8548	70	59.836	25	21.37
5	Scrap Value	0.8548	-20	-17.096		0
6	O&M cost	0.8219		0	30	24.657
7	O&M cost	0.7903		0	35	27.6605
8	O&M cost	0.7599		0	40	30.396
9	O&M cost	0.7307		0	45	32.8815
10	O&M cost	0.7026		0	50	35.13
10	Scrap Value	0.7026		0	-30	-21.078
	Total net cash outflow			372.764		552.279

Equivalent Annual Cost = Net Cash Outflow / Annuity Factor

For Used Chiller,

                                =372.764/4.4518

                                =83.7333

For New Chiller,

                                =552.279/8.1109

                                =68.091

The method used above is Equivalent Annual Cost as the life of both the assets are different and most predominantly there are cash outflows.

As the EAC[Equivalent Annual Cost] of New Chiller is lesser than that of the Used Chiller, it is recommended that the hospital may buy it.