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Tutorial 7 - Solution

This document discusses multiple alternative rate of return (ROR) analysis for engineering economics. It provides 4 examples comparing investment alternatives using incremental cash flows and rates of return. The first example compares a simple vs permanent wireless meter system. The second compares adding different metal nanoparticles to a product. The third compares using monoflange or multi-valve systems. The fourth compares 5 alternatives based on first cost, overall ROR, and incremental ROR to determine the best option based on manager's required annual minimum acceptable rate of return (MARR).

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Porkkodi Sugumaran
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
394 views

Tutorial 7 - Solution

This document discusses multiple alternative rate of return (ROR) analysis for engineering economics. It provides 4 examples comparing investment alternatives using incremental cash flows and rates of return. The first example compares a simple vs permanent wireless meter system. The second compares adding different metal nanoparticles to a product. The third compares using monoflange or multi-valve systems. The fourth compares 5 alternatives based on first cost, overall ROR, and incremental ROR to determine the best option based on manager's required annual minimum acceptable rate of return (MARR).

Uploaded by

Porkkodi Sugumaran
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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CHE4613 Engineering Economics – Tutorial 7 Page1

Chapter 8: Multiple Alternative ROR analysis

1. Two options are available for setting up a wireless meter scanner and controller. A simple setup
is good for 2 years and has an initial cost of RM12,000, no salvage value, and an operating cost
of RM27,000 per year. A more permanent system has a higher first cost of RM73,000, but it
has an estimated life of 6 years and a salvage value of RM15,000. It costs only RM14,000 per
year to operate and maintain. If the two options are compared using an incremental rate of
return, what are the incremental cash flows in (a) year 0 and (b) year 2?

Solution:
(a) year 0: Incremental CF0 = -73,000 - (-12,000) = $-61,000
(b) Year 2: Incremental operating cost = -14,000 – (-27,000) = $13,000
Re-purchase cost = 0 – (-12,000) = 12,000
Incremental CF2 = 13,000 + 12,000 = $25,000

2. The manager of Liquid Sleeve, Inc., a company that makes a sealing solution for machine shaft
surface that have been compromised by abrasion, high pressures, or inadequate lubrication, is
considering adding metal-based nanoparticles of either type Al or Fe to its solution to increase
the product’s performance at high temperature. The costs associated with each are shown
below. The company’s MARR is 20% per year. Do the following using a PW-based rate of
return analysis

(a) Determine which nanoparticle type the company should select using the ∆𝑖 ∗value
(b) On the same graph, plot the PW versus different i values for each alternatives. Indicate the
breakeven i* value and the MARR value on the plot
(c) Use the plot of PW versus ∆i values to select the better alternative with MARR = 20% per
year. Is the answer as in part (a)
Type Fe Type Al
First cost, RM -150,000 -280,000
Annual operating cost, RM per year -92,000 -74,000
Salvage value, RM 30,000 70,000
Life,years 2 4

Solution
(a) Construct tabulation to get incremental cash flow.
Incremental
Cash flows, $1000 cash flow, $1000
Year Type Fe Type Al (Al - Fe)
0 -150 -280 -130
1 -92 -74 18
2 -92 + 30 - 150 -74 138
3 -92 -74 18
4 -92 + 30 -74 + 70 58

0 = -130 + 18(P/A,Δi*,4) + 120(P/F,Δi*,2) + 40(P/F,Δi*,4)


Spreadsheet: Enter incremental cash flows and use IRR function to display
Δi* = 27.3%
Since 27.3% > MARR = 20%; select type Al (spreadsheet)

Eunice Phang Siew Wei |


CHE4613 Engineering Economics – Tutorial 7 Page2

(b) and (c) Plots are developed using i and Δi values. Decision is the same to select Al.

3. A manufacturer of hydraulic equipment is trying to determine whether it should use monoflange


double block and bleed (DBB) valves or a multi-valve system (MVS) for chemical injection.
The costs are shown below. Use an AW-based rate of return analysis and a MARR of 18% per
year to determine the better of the two options.
DBB MVS
First cost, RM -40,000 -71,000
Annual cost, RM per year -60,000 -65,000
Salvage value, RM 0 18,000
Life, years 2 4

Solution:
Find ROR for incremental cash flow over LCM of 4 years.
0 = -31,000(A/P,Δi*,4) - 5000 + 40,000(P/F,Δi*,2)(A/P,Δi*,4) + 18,000(A/F,Δi*,4)
Solve for Δi* by trial and error or spreadsheet
Δi* = 8.0% (spreadsheet)
Δi* < MARR = 18%; select DBB valves

4. The plant manager at Automaze Sdn. Bhd. Is looking at the summarized incremental ROR
information shown below for five mutually exclusive alternatives. The table includes overall
ROR and the incremental comparison of the alternatives. Which alternative is best if the
MARR is (a) 15% per year and (b) 12% per year.

Alternatives First Overall Incremental ROR, %


cost, RM ROR, % A B C D E
A – 80,000 14 - 12 11 17 24
B – 60,000 16 12 - 14 23 21
C – 40,000 17 11 14 - 35 29
D – 30,000 12 17 23 35 - 17
E – 20,000 8 24 21 29 17 -

Eunice Phang Siew Wei |


CHE4613 Engineering Economics – Tutorial 7 Page3

Solution:
(a) Rank alternatives: E,D,C,B,A; eliminate E,D and A because overall ROR<MARR
C vs B: ∆i* = 14%; eliminate B
SELECT ALTERNATIVE C

(b) Rank alternatives: E,D,C,B,A; eliminate E because overall ROR<MARR


C vs. D: ∆i* = 35%, eliminate D
B vs C: ∆i* = 14%, eliminate C
A vs B: ∆i* = 12%, eliminate B
SELECT ALTERNATIVE A

Eunice Phang Siew Wei |

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