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Annual Equivalent

Worth Criterion
Lecture No.19
Chapter 6
Contemporary Engineering Economics
Copyright 2006
Contemporary Engineering
Economics, 4th edition, 2007

Chapter Opening Story

Absorption Chillers for


Buildings

The most promising markets


commercial buildings,
government facilities, college
campuses, hospital complexes
Economically attractive where
there is a source of
inexpensive thermal energy at
temperatures between 212F
and 392 F

At Issue: Economic benefits of


the absorption chiller over the
conventional mechanical
chiller
Contemporary
Engineering Economics,

Annual Worth Analysis

Principle: Measure an investment worth on


annual basis
Benefit: By knowing the annual equivalent
worth, we can:

Seek consistency of report format


Determine the unit cost (or unit profit)
Facilitate the unequal project life
comparison
Contemporary
Engineering Economics,

Fundamental Decision Rule

Single Project Evaluation:

If AE(i) > 0, accept the investment.


If AE(i) = 0, remain indifferent to the investment
If AE(i) < 0, reject the investment

Comparing Mutually Exclusive Alternatives:

Service projects: select the alternative with the minimum annual


equivalent cost
Revenue projects: select the alternative with the maximum AE(i).

Contemporary
Engineering Economics,

Example 6.1 Economics of Installing A


Feedwater Heater

Install a 150MW unit:

Initial cost = $1,650,000


Service life = 25 years
Salvage value = 0
Expected improvement in fuel efficiency = 1%
Fuel cost = $0.05kWh
Load factor = 85%

Determine the annual worth for installing the unit at i


= 12%.
If the fuel cost increases at the annual rate of 4%,
what is AE(12%)?
Contemporary
Engineering Economics,

Calculation of Annual Fuel


Savings

Required input power before adding the second unit:


150, 000kW
272, 727 kW
0.55

Required input power after adding the second unit:


150, 000kW
267,857 kW
0.56

Reduction in energy: consumption: $4,871kW


Annual operating hours:
annual. operating hours = (365)(24)(0.85) =7,446 hours/year

Fuel savings:

Afuel savings (reduction in fuel requirement) (fuel cost)


(operating hours per year)
150,000kW 150, 000kW

($0.05/kWh)
0.55
0.56

(8,760)(0.85)hours/year

(4,871kW) ($0.05 / kWh) (7, 446 hours/year)


=$1,813,473/year

Contemporary
Engineering Economics,

Cash Flow Series by Varying


Fuel Prices

Contemporary
Engineering Economics,

Annual Worth Calculations

(a) with constant fuel price:


PW (12%) $1,650,000 $1,813,473( P / A,12%, 25)
$12,573,321
AE (12%) $12,573,321( A / P,12%, 25)
$1,603,098

(b) with escalating fuel price:


A1 =$1,813,473
PW (12%) $1,650,000 $1,813, 473( P / A1 , 4%,12%, 25)
$17, 463,697
AE (12%) $17,463,697( A / P,12%, 25)
$2,226,621

Contemporary
Engineering Economics,

Annual Equivalent Worth Repeating Cash Flow Cycles

Contemporary
Engineering Economics,

Annual Worth Calcualtion


First Cycle:

PW (12%) $1,000,000
[($800,000 $100,000( A G ,12%,4)]( P A ,12%,4)
$1,000,000 $2,017150
, .
$1,017150
, .
Repeating Cycles:

af

AE 12% = $1,017,150 A P , 12%, 4


= $334,880.

Contemporary
Engineering Economics,

Example 6.3 Comparing


Mutually Exclusive Alternatives

Contemporary
Engineering Economics,

Required Assumption

The service life of the selected alternative is required on a


continuous basis.
Each alternative will be replaced by an identical asset that has the
same costs and performance
Model A:

a f
AEa
15%f= 22,601a
A P , 15%, 3f

PW 15% = $22,601
= $9,899.

Model B:

a f
AEa
15%f= $25,562a
A P , 15%, 4f

PW 15% = $25,562
= $8,954.

Contemporary
Engineering Economics,