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An airline is considering two types of engine systems for use in its planes. Each has the same life and the same maintenance and repair record. System A costs $100,000 and uses 42,000 gallons per 1,000 hours of operation at the average load encountered in passenger service System B costs $240,000 and uses 25,000 gallons per 1,000 hours of operation at the same level Both engine systems have three-year lives before any major overhaul is required. On the basis of the initial investment, the systems have 8% salvage values lfjet fuel costs $2.13 a gallon (year 1 and fuel consumption is expected to increase at the rate of 7% per year because of degrading engine efficiency, which engine system should the firm install? Assume 2,000 hours of operation per year and a MARR of 10%. Use the AE criterion. What is the equivalent operating cost per hour for each engine? Assume an end-of-year convention for the fuel cost. Click the icon to view the interest factors for discrete compounding when MARR-10% per year158 i, 0 6253 02 64467 5732 0876 07016 15432 10000 F 15998 9 9 34906 38371 WF 0 1233 44556 02158 06253 07016 04321 10000 5732 0876 11000 00001 i, 0 0 0 15 00140 01361 2 597 459 Fa 12346 79111 79135 52515 45 2 2 9613 8766 The WF DI 0 0 0 0 0 00000 gntrN. 0 0 0 15 67697 373 459 9135 0 013 11222 N12345 6789 10

A) The equivalent annual costs for system A are $_____

B) The equivalent annual costs for system B are $_____

C) What is the equivalent operating cost per hour for engine A is $_____

D) What is the equivalent operating cost per hour for engine B is $_____

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Answer #1

Statement showing Total Costs, Annual Equivalent Cost & Operating Cost per hour 158 159 160| Year 161 162 163 164 165 166 167 168 169 PV Factor @ 10% System A 100000 PV 100000 System B 240000 PV (Initial Investment) (Initial Investment) 240000 0.9091 Fuel Cost 178920 162656.172 Fuel Cost 106500 96819.15 (42000/1000 2000) x $2.13 (25000/1000 2000) x$2.13 0.8264 191444.4 158209.6522 Fuel Cost 94172.412 Fuel Cost (17892010796) 113955 (10650010796) 0.7513 Fuel Cost 0845.508 153900.4302 Fuel Cost 121931.85 91607.39891 (191444.4107/100) (113955 107/100) 0.7513 Salvage Value (100007890) 8000 -6010.4 Salvage Value 19200 14424.96 172 173 174 175 176 (2400008%) NPV 568755.8543 2.4869 228700.7336 2000 114.35 NPV PVIF for 3 yrs Equivalent Annual Cost (a) 508174.0009 2.4869 201310.3438 2000 102.17 PVIF for 3 yrs Equivalent Annual Cost (a) Operating Hours (b) Operating Hours (b) rating Cost per hour (a/b) 173 179 180 181 Operating Cost per hour (ab) ence, it is advisable to install system B as the annual Equivalent cost is low

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