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 $90,000 and uses 38,000 gallons per 1,000 hours of operation at the average load encountered in passenger service. System B costs $350,000 and uses 26,000 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 16% salvage values. If jet fuel costs $2.09 a gallon (year 1) and fuel consumption is expected to increase at the rate of 5% per year because of degrading engine efficiency, which engine system should the firm install? Assume 3,000 hours of operation per year and a MARR of 14%. Use the AE criterion. What is the equivalent operating cost per hour for each engine? Assume an end-of-year convention for the fuel cost.

1) Equivalent operating cost per hour under system A

2) Equivalent operating cost per hour under system B

3) Equivalent cost per hour under system A

4) Equivalent cost per hour under system b