An energy efficient air compressor is proposed by a vendor. The compressor will cost $30,000 installed, and will require $1,000 worth of maintenance each year for its life of 10 years. Energy costs will be $6,000 per year. A standard air compressor will cost $25,000 and will require $500 worth of maintenance each year. Its energy costs will be $10,000 per year. If your company uses a MARR of 10%, would you invest in the energy-efficient air compressor?

Example below:

Alternative 1: Energy efficient air compressor

Alternative 2: Standard air compressor

Cash flows:

EOY Alternative 1 Alternative 2

0 $30,000 $25,000

1 $1,000 + $6,000 = $7,000 $500 + $10,000 = $10,500

2 $7,000 $10,500

3 $7,000 $10,500

4 $7,000 $10,500

5 $7,000 $10,500

6 $7,000 $10,500

7 $7,000 $10,500

8 $7,000 $10,500

9 $7,000 $10,500

10 $7,000 $10,500

(Note: In a Life Cycle Cost Analysis, all cash flows are costs, and the signs are ignored.) Analysis: LCC(Alt 1) = $30,000 +$7,000(P/A10,10) = $30,000 + $7,000(6.1446) = $73,012 LCC(Alt 2) = $25,000 + $10,500(P/A10,10) = $25,000 + $10,500(6.1446) = $89,518

LCC(Alt 1) = $30,000 +$7,000(P/A10,10)

= $30,000 + $7,000(6.1446)

= $73,012

LCC(Alt 2) = $25,000 + $10,500(P/A10,10)

= $25,000 + $10,500(6.1446)

= $89,518

• Compare the economics of the two options by calculating their simple payback, IRR, NPV, and LCOE (or LCC).
• Discuss the benefits and limitations with each metric and why different businesses and organizations may prefer one metric over another. to analyze the same efficiency project? Remember that different businesses may have different investment motivations.