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# Annual Equivalent

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

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,

## 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,

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

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

## Service projects: select the alternative with the minimum annual

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

Contemporary
Engineering Economics,

Feedwater Heater

## Initial cost = \$1,650,000

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

## 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,

Savings

150, 000kW
272, 727 kW
0.55

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,

## (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,