An airline is considering two types of engine systems for use in its planes. Each has the

Question:

An airline is considering two types of engine systems for use in its planes. Each has the same life and the same maintenance and repair record.
• System A costs $ 100,000 and uses 40,000 gallons per 1,000 hours of operation at the average load encountered in passenger service.
• System B costs $200,000 and uses 32,000 gallons per 1,000 hours of operation at the same level.
Both engine systems have three-year lives before any major overhaul is required. On the basis of the initial investment, the systems have 10% s. If jet fuel currently costs $2.10 a gallon and fuel consumption is expected to increase at the rate of 6% per year because of degrading engine efficiency, which engine system should the firm install? Assume 2,000 hours of operation per year and an of 10%. Use the AE criterion. What is the equivalent operating cost per hour for each engine?
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