Question

2. (35 points) The Mowbot plant must replace an existing HVAC unit (doing nothing is not an option). You are evaluating two pieces of equipment (Unit A and Unit B). Each unit offers a saving in annual energy cost over the existing equipment. Unit A $44,000 Unit B $65,000 Up front cost Operating cost/year Energy savings/year $1,900 $1,400 $18,000 $19,500 Salvage Value $2,000 $4,000 Economic life, years 5 7 Mowbot's MARR is 18%. Based on annual worth analysis (not incremental), which unit should you recommend?

Answer 1

Unit A:
Annual net savings:
Energy savings			18000
less: Annual operating cost			1900
Net annual savings				16100
Multiply: Annuity pVF at 12% for 5 yrs				3.12717
Present value of inflows				50347.44
Add: PV of salvage (2000*0.437109)				874.218
Total present value f inflows				51221.66
Less: Investment				44000
NPV				7221.655
Divide: Annuity PVF at 12% fofr 5 yrs				3.12717
Annual Worth				2309.326
Unit-B
Annual net savings:
Energy savings			19500
less: Annual operating cost			1400
Net annual savings				18100
Multiply: Annuity pVF at 12% for 7 yrs				3.81153
Present value of inflows				68988.69
Add: PV of salvage (4000*0.313925)				1255.7
Total present value f inflows				70244.39
Less: Investment				65000
NPV				5244.393
Divide: Annuity PVF at 12% fofr 5 yrs				3.81153
Annual Worth				1375.929
Unit-A is preferred