Question

U 15% PowrUp Investment Annual and salvage maintenance Repair -300 NGOM 300 OWN 300 Lloyd's Investment Annual Repair savings and salvage maintenance Savings 36,000 -800 25,000 35,000 -800 25,000 35,000 -800 25,000 300 35,000 -800 25,000 35,000 -800 25,000 -300 35,000 2.000 -800 25,000 -300 35,000 -300 35,000 -300 35,000 15 -300 35,000 16 -300 35,000 17 AW element -6,642 -800 25,000 -7,025 -300 35,000 18 Total AW $ 17,558 $ 27,675 Figure 6-9 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?

Answer 1

Answer:

1. Graph of newly estimated maintenance cost and repair savings projections: Newly estimated maintenance costs are calculated in below table with first 3 year cost as $ 300, 4th year cost as $1200 and after that 10% increase every year. TABLE 1: Calculation of maintenance cost Year Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 2 Year 3 Year 10 1 Maintenance $300 $300 $300 $1,200 $1,320 $1,452 $1,597 $1,757 $1,933 $2,126 Cost

Accordingly graph has been plotted below: Maintenance Cost $2,500 $2,000 $1.933 $1,757 $1 597 $1.452 $1,500 $1,320 $1,200 Maintenance Cost $1,000 $500 $300 $300 $300 S. + Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Newly estimated repair saving projections are calculated in below table with first 3 year saving as $35,000, $32,000 and $28,000 and after that $2,000 decrease every year.

Table 2: Repair Savings Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 $35,000 $32,000 $28,000 $26,000 $24,000 $22,000 $20,000 $18,000 $16,000 $14,000 Repair Savings

Repair Savings $40,000 $35,000 $35,000 $32,000 $30,000 $28,000 $26,000 $25,000 $24,000 $22,000 - Repair Savings $20,000 $20,000 $18,000 $16.000 $15,000 $14,000 $10,000+ Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

2. Calculation of annual worth (AW): a. With revised estimates from year 3: Costs and saving with revised estimates: Maintenance Cost Repair Savings Year 1 $300 $35,000 Year 2 $300 $32,000 Year 3 $300 $28,000 Year 4 $1,200 $26,000 Year 5 $1,320 $24,000 Year 6 $1,452 $22,000 Year 7 $1,597 $20,000 Year 8 $1,757 $18,000

Year 9 $1,933 $16,000 Year 10 $2,126 $14,000 Total $12,285 $235,000 Total costs for 10 years = $12,285 Total savings for 10 years = $235,000 Net worth = $235,000 - $12,285 = $222,715 Annual Worth = $222,715/10 = $22,271.50 b. With revised estimates from year 1: Costs and savings are tabulated below: Maintenance Cost Repair Savings Year 1 $1,200 $35,000 Year 2 $1,320 $32,000 Year 3 $1,452 $28,000

Year 4 $1,597 $26,000 Year 5 $1,757 $24,000 Year 6 $1,933 $22,000 Year 7 $2,126 $20,000 Year 8 $2,338 $18,000 Year 9 $2,572 $16,000 Year 10 $2,830 $14,000 Total $19,125 $235,000

Total costs for 10 years = $19,125 Total savings for 10 years = $235,000 Net worth = $235,000 - $19,125 = $215,875 Annual Worth = $215,875/10 = $21,578.50 Hence the Lloyd's is still a economic choice. 3. Determination of change in capital recovery: Capital recovery = Cumulative net worth Net worth with revised estimate from section 2 (a) = $222,715 Capital recovery with initial estimates has been calculated in below table:

Maintenance Cost Repair Savings Year 1 $300 $35,000 Year 2 $300 $35,000 Year 3 $300 $35,000 Year 4 $300 $35,000 Year 5 $300 $35,000 Year 6 $300 $35,000 Year 7 $300 $35,000 Year 8 $300 $35,000 Year 9 $300 $35,000 Year 10 $300 $35,000 Total $3,000 $350,000

Total costs for 10 years = $3,000 Total savings for 10 years = $350,000 Net worth = $350,000 - $3,000 = $347,000 Change in capital recovery amount = $ 347,000 - $222,715 = $124,285 Hence the capital recovery amount has been decreased by $124,285 due to increase in costs and decrease in savings.

Answer 2