CASE STUDY

THE CHANGING SCENARIO OF AN ANNUAL VALUE ANALYSIS

Harry, owner of a battery distributor in Atlanta, Georgia, conducted an economic analysis 3 years ago when he decided to put voltage protectors in line for all the important pieces of his test equipment. The estimates used and the annual value analysis at a MARR = 15% are summarized here. Two protectors from two different manufacturers are compared.

The Excel spreadsheet shown below was used to make the decision. The Lloyd company was the clear decision due to its substantially higher AW value. Lloyd's guards were installed.

During a quick review this past year (year 3 of operation), it was obvious that maintenance costs and repair savings had not been in accordance with the estimates made 3 years ago. In fact, the maintenance contract (which includes quarterly inspection) will increase from $ 300 to $ 1200 next year and from there will 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. Harry believes that the savings can decrease by $ 2,000 per year thereafter. Finally, these old protectors of 3 years are worthless in today's market. This makes the residual value in 7 years zero instead of $ 3,000.

Requirements

Build the calculation sheet in Excel according to the image shown below.

Questions:

a. Graph for projections of estimated maintenance costs and repair savings for the Lloyd company, assuming the protectors last 7 more years. For this, consider the old estimates (as shown in the Excel file).

b. With the new estimates of the problem, replace the values of the estimates in the Excel file. What is the recalculated AW for Lloyd's protectors? Would Lloyd be the economic choice if we let ourselves be carried away by these new estimates? Why or why not?

c. How has the amount of capital recovery for Lloyd's protectors changed with these new estimates? You must set the difference in AW (annual value).

COST AND INSTALLATION ANNUAL MAINTENANCE COST SALVAGE VALUE EQUIPMENT REPARATION SAVINGS LIFE SPAM (YEARS) POWRUP (S)LLOYD (S) $26,000-$36,000 S300 $3,000 S800 $2,000 $25,000 $35,000 | 10 COST AND INSTALLATION ANNUAL MAINTENANCE COST SALVAGE VALUE EQUIPMENT REPARATION SAVINGS LIFE SPAM (YEARS) POWRUP (S)LLOYD (S) $26,000-$36,000 S300 $3,000 S800 $2,000 $25,000 $35,000 | 10