Presentation Transcript
Slide 1:Examples on the present worth analysis
Example :Example A company has been contracted by Dammam Municipality to construct a bridge within 3 years.
The company will require a vertical driller.
There are two used models available:
Model A costs 205,000 SR, has a life of 10,000 hours, has operating cost of 50,000 SR per year for 2,000 hours operation. At this usage rate, the driller will run for 5 years. Its salvage value after 3 years is 130,000 SR.
Model B costs 275,000 SR, has life of 14,000 hours, costs 32,500 SR to operate. Its salvage value after 3 years is estimated at 180,000 SR.
Slide 3:The two options are illustrated in the following figure.
Slide 4:The present worths of the two options are (15%):
Since Model B has lower present cost, the company should choose Model B.
Example :Example An international company just moved into Khobar for a contract with Aramco to supply special parts.
The company is contracted for 10 years, and it just rented a warehouse for parts storage.
To move parts in the warehouse, it has two options: conveyor system or forklift.
The conveyor system has an expected life of 8 years, and the forklift is expected to last for 6 years.
Slide 6:The capital costs, repair and operation costs, and salvage values are shown in the cash flow table:
Slide 7:The overhaul of the conveyor system is 18,000 SR to extend its life by 2 years, the salvage value will be 6,000 SR.
If the company chooses to buy the forklift, the company can lease a comparable forklift to cover the remaining period, with a lease cost of 8,000 SR per year, payable at the beginning of the year.
The company MARR is 12%.
Which system the company should choose?
Slide 8:The cash flow table is now becomes: