CASE STUDY ANNUAL WORTH ANALYSIS-THEN AND NOW Background and Information Harry, owner of an automobile battery distributorship in Atlanta, Georgia, performed an economic analysis 3 years ago when he decided to place surge protectors in-line for all his major pieces of testing equipment. The estimates used and the annual worth analysis at MARR = 15% are summarized below. Two different manufacturers' protectors were compared PowrUp Lloyd's Cost and installation, $ -26,000 -36,000 Annual maintenance cost, $ per year --800 -300 Salvage value, $ 2,000 3,000 Equipment repair savings, $ 25,000 35,000 Useful life, years 10 The spreadsheet in Figure 6-9 is the one Harry used to make the decision. Lloyd's was the clear choice due to its substantially larger AW value. The Lloyd's protectors were installed. 6 0 0 0 0 w 0 0 0 B D 1 MARR = 15% 2 3 PowrUp Lloyd's 4 Investment Annual Repair Investment Annual Repair 5 Year and salvage maintenance savings and salvage maintenance Savings 6 -26,000 0 0 -36,000 0 0 7 -800 25,000 -300 35,000 8 2 0 -800 25,000 -300 35,000 9 0 -800 25,000 0 -300 35,000 10 4 0 -800 25,000 -300 35,000 11 5 -800 25,000 -300 35,000 12 6 2,000 -800 25,000 0 -300 35,000 13 7 0 -300 35,000 14 8 0 -300 35,000 15 9 0 -300 35,000 16 10 3,000 -300 35,000 17 AW element -6,642 -800 25,000 -7,025 -300 35,000 18 Total AW $ 17,558 $ 27,675 Figure 6-9 Annual worth analysis of surge protector alternatives, case study During a quick review this last year (year 3 of operation), it was obvious that the maintenance costs and repair savings have not followed (and will not follow) the estimates made 3 years ago. In fact, the maintenance contract cost (which includes quarterly inspection) is going from $300 to $1200 per year next year and will then increase 10% per year for the next 10 years. Also, the repair savings for the last 3 years were $35,000, $32,000, and $28,000, as best as Harry can determine. He believes savings will decrease by $2000 per year hereafter. Finally, these 3-year-old protectors are worth nothing on the market now, so the salvage in 7 years is zero, not $3000. Case Study Exercises 1. Plot a graph of the newly estimated maintenance costs and repair savings projections, assuming the protectors last for seven more years. 2. With these new estimates, what is the recalculated AW for the Lloyd's protectors? Use the old first cost and maintenance cost estimates for the first 3 years. If these estimates had been made 3 years ago, would Lloyd's still have been the economic choice? 3. How has the capital recovery amount changed for the Lloyd's protectors with these new estimates