EQUIVALENT ANNUAL

WORTH COMPARISONS

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 1
■ A consulting firm proposes to provide “self inspection” training for
clerks who work with insurance claims. The program lasts for 1
year costs $2000/- per month, and professes to improve quality
while reducing clerical time. A potential user of the program
estimates that saving in the first month should amount to $800/-
and should increase by $400/- per month for the rest of the year
■ However operational confusion and work interference are expected
to boost clerical cost by $1200/- the first month, but this amount
should subsequently decline in equal increments at the rate of
$100/- per month. If the required return on money is 12%
compounded monthly and there is a stipulation that the program
must pay for itself within 1 year, should the consultant be hired

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 1

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 1 - Solution
■ Find Equivalent Monthly worth of savings
■ Annual savings = $ 2,947/-
■ Find Equivalent Monthly worth of Cost
■ Annual cost = $ 2,663/-
■ Net annual worth = Annual Savings – Annual Costs
■ Net Annual worth = $ 284/-
The program pays for itself hence, the consultant can be hired

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 2
■ The purchase of a truck with an operators platform on a
telescopic hydraulic boom will reduce labor cost for sign
installations by $ 15,000/- per year. The price of a boom
truck is $ 93,000/- and its operating cost will exceed
those of present equipment by $ 250/- per month. The
resale value is expected to be $ 18,000/- in 8 years.
Should the boom truck be purchased when the current
available interest rate is 7%

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 2

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 2 Solution
■ Find Equivalent Annual Savings
■ Annual saving= $ 16,754.46
■ Find Equivalent Annual Costs
■ Annual cost= $ 18,574.71
■ Equivalent Net Annual worth = Annual Savings – Annual Costs
■ EAW = $ - 1,820.25
Equivalent annual worth is negative hence purchasing the boom truck is to be deferred
until the annual savings increases

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 3
■ A supplier of laboratory equipment estimate that profit from
sales should increase by 20,000/- per year. If a mobile
demonstration unit is built. A large unit with sleeping
accommodations for driver will cost 97,000/- while a smaller
unit without sleeping quarters will be 63,000/- salvage values
for the larger and smaller units after 5 years in use will be
9,700/- and 3,000/- respectively. Lodging cost saved by the
larger unit should amount to 11,000/- annually, but its yearly
transformation cost will exceed those of the smaller unit by
3,100/-. With money at 9%, should a mobile demonstration
unit be built? And if so which size is preferable.

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 3

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 3 Solution
Large Mobile Demonstration Unit Small Mobile Demonstration Unit
■ Find Annual worth of large mobile ■ Find Annual worth of Small mobile
demonstration unit demonstration unit
■ EAW = Asavings – Acost ■ EAW = Asavings – Acost
■ Asavings = 32620.773 ■ Asavings = 20584.815
■ Acost = 28037.73 ■ Acost = 16196=67
■ Net EAWLarge = 4583=04 ■ Net EAWSmall = 4388=145
A per calculations EAW of Large unit is greater than EAW of smaller unit. Hence it is advisable
to choose Large Mobile Unit
Criteria is that Lodging rate remains same / constant throughout the analysis horizon and
fuel rate remains same / constant
Module 4 – Annual Present Worth Comparisons Global Academy of Technology
COMPARISONS OF ASSETS WITH
EQUAL AND UNEQUAL LIVES

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Comparisons of Assets with Equal and Unequal
lives
■ Equivalent annual worth comparisons of assets with
equal and unequal lives.
– The annual worth or costs are found and then
compared

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 4
■ Two models of small machines perform the same
function Type 1 has a low initial cost of 9,500/- relatively
high operating cost of 1,900/- per year more than those
of the Type 2 machine and a short life of 4 years. The
more expensive Type 2 machine cost 25,100/- and be
kept in service economically for 8 years. The scrap value
from either machine at the end of its life will barely cover
its removal cost which is preferred when minimum
attractive rate of return is 8 %.
Module 4 – Annual Present Worth Comparisons Global Academy of Technology
Problem 4

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 4 Solution
Model Type – 1 Machine Model Type – 2 Machine
■ All values are costs hence ■ All values are costs hence
calculate EAC of model Type 1 calculate EAC of Model Type 2
■ EAC = 4768/- ■ EAC = 4388/-
Type 2 model machine has a lower annual cost for service during next 8
years and hence Model Type 2 Machine is selected

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

 VTU QUESTIONS

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 5
■ Two types of power converter Alpha and Beta are under
considerations for a particular application. An economic
comparison is to be made at an interest rate of 10%.
Following cost estimation has been obtained. Determine the
Annual equivalent costs of the two systems, select the best
converter (VTU – Dec2013 – Jan2014)
Cost Particulars Alpha Beta
Purchase Price Rs 10,000/- Rs 25,000/-
Estimated Service Life 5 years 9 years
Salvage Value Rs 3,000/- Rs 5,000/-
Annual Operating cost Rs 2,500/- Rs 1,200/-
Module 4 – Annual Present Worth Comparisons Global Academy of Technology
Problem 5

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 5 Solution
■ Find EAC value of Alpha Convertor
– EAC = Capital recovery + Annual Costs
– EAC = 4646.6
■ Find EAC value of Beta convertor
– EAC = Capital recovery + Annual Costs
– EAC = 5448.80
■ Comparing both Alpha and Beta convertors EAC values which
are negative as they represent costs. Hence least negative
value should be selected which would be EAC of Alpha
convertor

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 6
■ A conventional Agricultural Equipment has a service of 6
years. Newly designed equipment is 50% costlier than the
conventional one but has many advantages. The
operating costs of both these equipment are almost
same and salvage value is negligible. What will be the
service life of the new equipment that makes its cost
comparable to that of the conventional one at i=10%?
(VTU – Dec 2013 – Jan 2014)

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 6 Solution
■ Condition is to make costs of new agricultural equipment
comparable to that of the conventional one
■ EAC of New = EAC of Old where n for old is know = 6
years
■ N = 11.11 years
■ The service life of the new equipment is to be N = 11.11
years which would make its costs comparable to that of
the conventional one
Module 4 – Annual Present Worth Comparisons Global Academy of Technology
Problem 7
■ A city maintenance crew has experience with conventional
back hoe that suggests that its service life is 6 years. A newly
designed machine costs 50% more than the conventional
machine but is quieter in operations, which will make it more
adoptable to residential neighborhoods. Both machines will
have about the same operating costs, and salvage costs are
expected to be negligible. What will be the service life of the
new backhoe have to be to make its cost comparable to that
of conventional machine at i=10%? (VTU – Dec 2014 – Jan
2015)
■ Similar to the one already solved Problem No 5

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 8
■ A sheltered workshop requires a lift truck to handle pallets for
a new contract. A lift truck can be purchased for Rs
2,70,000/-. Annual insurance costs are 3% of the purchase
price, payable on the first of each year. An equivalent truck
can be rented Rs 15,000/- per month payable at the end of
each month. Operating costs are same for both alternatives.
For what minimum number of month must a purchased truck
be used on the contract to make purchasing more attractive
than leasing? Interest is 12% compounded monthly. Assume
that the purchased truck has no salvage value. (VTU – Dec
2014 – Jan 2015)

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 8

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 8 Solution
■ Interest i=12/12 = 1% per month
■ To Make purchase of truck more attractive than leasing
Match or equate two alternatives on monthly basis and
find N value
■ N = 19.98 Months or 20 Months
■ For 20 minimum number of months must a purchased
truck to be used so that purchasing options becomes
more attractive than leasing
Module 4 – Annual Present Worth Comparisons Global Academy of Technology
Problem 9
■ Two models of small machines perform the same function.
Type 1 machine has a low initial cost of Rs. 9,500/- and
relatively high operating costs of Rs 1,900/- year more than
those of Type 2 Machine and a short life of 4 years. The more
expensive Type 2 machine costs Rs 25,100/- and can be kept
in service economically for 8 years. Which machine is
preferred when the MARR is 8% using equivalent annual cost
method? (VTU – Dec 2015 – Jan 2016)
■ Same as Problem No 4

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 10
■ A company invests in one of the two mutually exclusive
alternatives. The life of both alternatives is estimated to
be 5 years with the following cash flow. Determine the
best alternative based on the annual equivalent method
by assuming i=25%. (VTU – Dec 2015 – Jan 2016)
Alternative
Cash flow
A B
Investment (Rs) -1.5 Lakhs -1.75 Lakhs
Annual return (Rs) 60,000/- 70,000/-
Salvage Value (Rs) 15,000/- 35,000/-
Module 4 – Annual Present Worth Comparisons Global Academy of Technology
Problem 10

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 10
■ Find Annual worth of Alternative A
■ EAW = 6050.25
■ Find Annual worth of Alternative B
■ EAW = 9191
■ Alternative B which has highest annual worth of 9191 is
the best alternative based on annual worth method

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 11
■ The following costs are estimated for two equal service
machines in a manufacturing plants. If the minimum
required rate of return is 15% per year, which machines
should be selected? (VTU – June/July 2014)
Machine – 1 Machine – 2
First cost (Rs) 2,60,000/- 3,60,000/-
Annual Maintenance cost (Rs) 8,000/- 3,000/-
Annual Labor cost (Rs) 1,10,000/- 70,000/-
Extra income taxes (Rs) - 26,000/-
Salvage Value (Rs) 20,000/- 30,000/-
Life (years) 4 4

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 11

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 11
■ Find Equivalent Annual costs EAC of Machine A
■ EAC = - 205,064.80 (negative Value)
■ Find Equivalent Annual costs EAC of Machine B
■ EAC = - 219,089.10 (Negative Value)
■ Of the two machine A and B, Machine A has the least
negative EAC value hence Machine A is to be selected

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 12
■ Two machine models A and B perform the same function Type
A machine has low initial cost of Rs 75,000/- relatively high
operating cost of Rs 15,000/- per year more than those of
type B machine and a short life of 4 years. Type B machine
cost Rs 1,00,000/- and operating cost of Rs 5,000/- per year
can be kept in service economically for 8 years. The scarp
value from either machine at the end of the life will barely
cover its removal cost. Which is preferred using an equivalent
annual cost, when the minimum attractive rate of return is
9%? (VTU – June/July 2014)

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 12

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 12
■ Find Equivalent Annual worth of Model A Machine
■ EAC = 38,150.25
■ Find Equivalent Annual worth of Model A machine
■ EAC = 23,067
■ Machine Model B has less EAC value hence Machine
Model B is preferred

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 13
■ First cost of an asset is Rs 5,00,000/-. The annual
maintenance in the first year is Rs 2,000/- and increase
by Rs 1,000/- every year up to 10th year. The annual
income is expected to be Rs 50,000/- in the first year
with increase of Rs 25,000 every year up to 10th year.
The operating cost is Rs 6,000/- per year. The salvage
value is Rs 30,000/- at the end of 10th year. Find the
equivalent annual cost of the machine at 12% interest
rate. (VTU – June / July 2016)
Module 4 – Annual Present Worth Comparisons Global Academy of Technology
Problem 13 Solution

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 13 Solution

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 14
■ An asset was purchased five years ago for Rs 52,000/-. It
was expected to have an economic life of 8 years at
which salvage value would be Rs 4,000/-. If the function
of the asset would no longer needed for what price must
be sold now to recover the invested capital when i=12%.

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 14

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 14
■ Find EAC for 8 years
■ EAC = 10,142.40
■ Find Present Value of remaining EAC value to find selling price
of the asset as of today
■ Present Value (P) of EAC at year 5 of remaining 3 years
■ P = 24,360.32

■ The asset is to be sold at 24,360.32 or above to recover the

invested capital

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

 GENERAL PROBLEMS

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 15
■ A large gasoline station is required by the city to install vapor
containment equipment on its gasoline pump nozzles and
storage tank vents. The immediate conversion cost will be $
180,000 with an estimated $ 600 per year for maintenance.
It will be necessary to update the equipment every 3 years at
a cost of $ 3,500. The station pumps an average of 1 million
gallons of gasoline per month. On an annual basis what would
be the price increase per gallon necessary to pay for the
conversion over a six year period? Include 6th year update
cost in your analysis and assume an interest rate of 14%

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 15

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 15

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 16
■ A food beverage company is planning expansion of its
cold storage facility. Three alternatives site design
proposal are being considered that uses of MARR 10%.
Plan A and B require an expenditure of Rs 35,00,000/-
for land and which will retain its value in 10 years. While
Plan C requires Rs 45,00,000/- for land which will also
retain its value in 10 years. The estimated income
increase due to facility available is annualized at
24,80,000/- per year. The company requires that a life of
10 years be used for analysis
Module 4 – Annual Present Worth Comparisons Global Academy of Technology
Problem 16
■ Estimate which proposal to recommend using equated
annual worth analysis and rank proposals.
Proposal A Proposal B Proposal C
Building and Installation 60,00,000/- 70,00,000/- 40,00,000/-
Compressors 10,00,000/- 13,50,000/- 8,50,000/-
Expected energy cost 1 year 6,50,000/- 4,80,000/- 6,50,000/-
Energy cost increase for each
30,000/- 20,000/- 35,000/-
additional year
Annual maintenance cost 2,00,000/- 1,50,000/- 5,00,000/-
Estimated Salvage value 3,50,000/- 4,30,000/- 1,80,000/-

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 16 – Proposal A

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 16 – Proposal B

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 16 – Proposal C

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 16
■ Find EAW of all Proposal
■ Proposal A = -168676.30/-
■ Proposal B = -126114.20/-
■ Proposal C = -310808.60/-

■ Equivalent annual worth of Proposal B is less compared

to all 3 plans hence Proposal B is considered for
Implementation
Module 4 – Annual Present Worth Comparisons Global Academy of Technology
Problem 17
■ A Company owns several gasoline stations in a major city. It is
decided that a major television advertising campaign will greatly
improve income. Initial development cost for the advertisements
will be 120,000/- monthly television airing costs are quoted at
35,000/- for the first month decreasing by 500/- per month there
after during the period the ads will run, which is 18 months.
Revenues are expected to increase by 40,000/- in the first month
and increase 700/- per month there after for 11 months more. The
last 6 months of the study are expected to see a linear decline of
300/- per month from for the peak increase. Determine whether
the campaign will be economically viable using a equivalent
monthly worth analysis. Assume nominal interest rate of 12% with
monthly compounding.

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 18
■ The athletic department of a university is proposing that a new general purpose
stadium be constructed on campus. A design utilization, a combination earth
work bowl with a steel upper deck and press box is being considered. The
following cost estimated have been developed
First cost of complete construction 32000000
Paint steel structure every 6 years 2000000
Replace wooden seats every 10 years 4000000
Repave parking facilities and ramps every 12 years 3000000
Annual maintenance 1500000
■ Assume a 60 year life and negligible salvage value determine the minimum
annual revenue that could justify the project. Using tax free interest rate of 7%

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 19
■ Granite rock and gravel company is considering the feasibility of purchasing a piece of
land for a small quarrying operations. The following cost estimates have been developed
for evaluating the venture
Cost of Land 2,000,000
Site clearing and road preparation 200,000
Annual operating cost
First year 400,000
Increase for each additional year of operations 50,000
Site cleanup prior to resale 100,000
■ The quarry will probably have a useful life of 10 years and the reclaimed site should have
a resale value of $ 1 million. Using an interest rate of 15% determine the equivalent
annual cost of this operation.

Module 4 – Annual Present Worth Comparisons Global Academy of Technology

Problem 20
■ A person wants to buy a home theatre system. He estimates
that it will last at least for 10 Years at the end of which it will
not have any salvage value. Show room offers him two
alternative ways to pay for the system. Pay Rs 100,000/-
immediately and Rs 50,000/- at the end of one year
■ Pay nothing until the end of three years and make a single
payment of Rs 200,000/-
■ If the buyer believes 12% is a suitable rate of interest which
alternative is best? (VTU – June/July – 2015)
Module 4 – Annual Present Worth Comparisons Global Academy of Technology