CASE STUDY

ANNUAL WORTH ANALYSISTHEN AND NOW

Background and Information

Mohamad, owner of an residential furnished apartment's in Dubai, performed an economic analysis 5 years ago when he decided to place an new eefficient central AC unit for each apartments instead of old split units windows type in each room. The estimates used and the annual worth analysis at MARR = 12% are summarized below. Two different AC brands were compared.

	LG	York
Cost and installation, $	26,000	30,000
Annual maintenance cost, $ per year	800	300
Salvage value, $	2,000	3,000
Electrical power savings, $ per year	25,000	35,000
Useful life, years	7	10

The spreadsheet in below sheet is the one Mohamad used to make the decision. York was the clear choice due to its substantially larger AW value, hence York AC units were installed.

MARR	12%
		LG			York
	Investment	Annual	Repair	Investment	Annual	Repair
Years	and salvage	maintenance	savings	and salvage	maintenance	savings
0	-$26,000	$0	$0	-$30,000	$0	$0
1	$0	-$800	$25,000	$0	-$300	$35,000
2	$0	-$800	$25,000	$0	-$300	$35,000
3	$0	-$800	$25,000	$0	-$300	$35,000
4	$0	-$800	$25,000	$0	-$300	$35,000
5	$0	-$800	$25,000	$0	-$300	$35,000
6	$0	-$800	$25,000	$0	-$300	$35,000
7	$2,000	-$800	$25,000	$0	-$300	$35,000
8				$0	-$300	$35,000
9				$0	-$300	$35,000
10				$3,000	-$300	$35,000
AW element	-$6,068	-$800	$25,000	-$5,139	-$300	$35,000
Total AW			$18,701.17			$29,561.43

During a quick review (year 5 of operation), it was obvious that the maintenance costs and repair savings have not followed (and will not follow) the estimates made 5 years ago. In fact, the maintenance contract cost is going from $300 this year (year 5) to $1200 per year next year and will then increase 9% per year for the next 4 years( up to year 10). Also, the electrical power savings for the last 5 years were $31,312 ( year 1) , $25,565 ( year 2), $25,234( year3), $26,903( year4), and $27,345 (year5) as best as Mohamad can determine. He believes savings will decrease by $1,200 per year hereafter. Finally, these 5-year-old AC units are worth nothing on the market now, so the salvage in is zero, not $3000.

Q1 - With these new estimates, What is the AW of the Investment and Salvage value for YORK AC unit?

Q2 - With these new estimates, What is the FW of the Investment and Salvage value for YORK AC unit?

Q3 - With these new estimates, what is the recalculated AW maintenance cost for the YORK AC units?

Q4 - With these new estimates, what is the recalculated PW maintenance cost for the YORK AC units?

Q5 - With these new estimates, what is the recalculated Total AW cost for YORK AC units.

Q6 - With these new estimates, what is the recalculated Total FW cost for YORK AC units.

Q7 - With these new estimates, what is the recalculated Total PW cost for YORK AC units.

Q8 - If these estimates had been made 5 years ago, would YORK still have been the economic choice, why explain your answer

Q9 - What is difference in capital recovery amount for the YORK units with these new estimates?

Q10 - If MARR is changed to 10% for the upcoming 5 years what will be the Total PW for the YORK units?