An airline is considering two types of engine systems for use in its planes. Each has the same life and the samemaintenance and repair record.System A costs $90,000 and uses 37,000 gallons per 1,000 hours of operation at the average load encountered inpassenger service.System B costs $250,000 and uses 26,000 gallons per 1,000 hours of operation at the same level.Both engine systems have three-year lives before any major overhaul is required. On the basis of the initialinvestment, the systems have 18% salvage values. If jet fuel costs $1.87 a gallon (year 1) and fuel consumption isexpected to increase at the rate of 11% per year because of degrading engine efficiency, which engine system shouldthe firm install? Assume 3,000 hours of operation per year and a MARR of 9%. Use the AE criterion. What is theequivalent operating cost per hour for each engine?Assume an end-of-year convention for the fuel cost.4Click the icon to view the interest factors for discrete compounding when MARR = 9% per year.****The equivalent annual costs for system A are $. (Round to the nearest dollar.)

Equivalent annual cost refers to the cost that is owned, operated, and maintained for an asset in…

Answered: An airline is considering two types of…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 18P

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An airline is considering two types of enginesystems for use in its planes. Each has the same lifeand the same maintenance and repair record.• System A costs $100,000 and uses 40,000 gallonsper 1,000 hours of operation at the average loadencountered in passenger service.• System B costs $200,000 and uses 32,000 gallonsper 1,000 hours of operation at the same level.Both engine systems have three-year lives before anymajor overhaul is required. On the basis of the initialinvestment, the systems have 10% salvage values. Ifjet fuel currently costs $2.10 a gallon and fuel consumption is expected to increase at the rate of 6% peryear because of degrading engine efficiency, whichengine system should the firm install? Assume 2,000hours of operation per year and an MARR of 10%.Use the AE criterion. What is the equivalent operating cost per hour for each engine?
An airline is considering two types of engine systems for use in its planes:A. System A costs $100,000 and uses 40,000 gallons of fuel per 1,000 hours of operation at the average load encountered in passenger service.B. System B costs $200,000 and uses 32,000 gallons of fuel per 1,000 hours of operation at the average load encountered in passenger service.Both engine systems have the same life and the same maintenance and repair record. and both have a three-year life before any major overhaul is required. Each system has a salvage value of 10% of the initial investment. If jet fuel costs $4.80 per gallon currently and fuel consumption is expected to increase at the rate of 6% per year because of degrading engine efficiency, which engine system should the firm install? Assume 2,000 hours of operation per year and an MARR of 10%. Use the AE criterion. What is the equivalent operating cost per hour for each engine?
An airline is considering two types of engine systems for use in its planes:1'111 System A costs $100,000 and uses 40,000 gallons of fuel per 1,000 hours of operation at the average load encountered in passenger service.lliB System B costs $200,000 and uses 32,000 gallons of fuel per 1,000 hours of operation at the average load encountered in passenger service.Both engine systems have the same life and the same maintenance and repair record. and both have a three-year life before any major overhaul is required. Each system has a salvage value of 10% of the initial investment. If jet fuel costs $4.80 per gallon currently and fuel consumption is expected to increase at the rate of 6% per year because of degrading engine efficiency, which engine system should the firm install? Assume 2,000 hours of operation per year and an MARR of 10%. Use the AE criterion. What is the equivalent operating cost per hour for each engine?
Air Florida is considering two types of engines for use in its planes, each ofwhich has the same life, same maintenance costs. and same repair record:1. Engine A costs $100,000 and uses 50,000 gallons of fuel per 1,000 hours of operation at the average service load encountered in passenger service.2. Engine B costs $200,000 and uses 32,000 gallons of fuel per 1,000 hours of operation at the same service load.Both engines are estimated to operate for 10,000 service hours before any major overhaul of the engines is required. If fuel currently costs $1.25 per gallon and its price is expected to increase at a rate of 8% because of inflation, which engine should the firm install for an expected 2,000 hours of operation per year? The firm's marginal income-tax rate is 40%, and the engine will be depreciated by the units-of-production method. Assume that the firm's market interest rate is 20%. It is estimated that both engines will retain a market value of 40% of their initial cost (actual…
Air Florida is considering two types of engines for use in its planes, each ofwhich has the same life, same maintenance costs. and same repair record:ii Engine A costs $100,000 and uses 50,000 gallons of fuel per 1,000 hours of operation at the average service load encountered in passenger service.tm Engine B costs $200,000 and uses 32,000 gallons of fuel per 1,000 hours of operation at the same service load.Both engines are estimated to operate for 10,000 service hours before any major overhaul of the engines is required. If fuel currently costs $1.25 per gallon and its price is expected to increase at a rate of 8% because of inflation, which engine should the firm install for an expected 2,000 hours of operation per year? The firm's marginal income-tax rate is 40%, and the engine will be depreciated by the units-of-production method. Assume that the firm's market interest rate is 20%. It is estimated that both engines will retain market value of 40% of their initial cost (actual…
Norton Auto Parts, Inc., is considering two different forklift trucks for use in its assembly plant:1. Truck A costs $15,000 and requires $3,000 in annual operating expenses. It will have a $5,000 salvage value at the end of its three-year service life.2. Truck B costs $20,000 but requires only $2,000 in annual operating expenses; its service life is four years after which its expected salvage value is $8,000. The firm's MARR is 12%. Assuming that the truck is needed for 12 years and that no significant changes are expected in the future price and functional capacity of both trucks, select the most economical truck based on AE analysis.
Norton Auto Parts, Inc., is considering two different forklift trucks for use in its assembly plant:A. Truck A costs $15,000 and requires $3,000 in annual operating expenses. It will have a $5,000 salvage value at the end of its three-year service life.B. Truck B costs $20,000 but requires only $2,000 in annual operating expenses; its service life is four years after which its expected salvage value is $8,000. The firm's MARR is 12%. Assuming that the truck is needed for 12 years and that no significant changes are expected in the future price and functional capacity of both trucks, select the most economical truck based on AE analysis.
Ellison Inc., a manufacturer of steel school lockers, plans to purchase a new punch press for use in its manufacturing process. After contacting the appropriate vendors, the purchasing department received differing terms and options from each vendor. The Engineering Department has determined that each vendor’s punch press is substantially identical and each has a useful life of 20 years. In addition, Engineering has estimated that required year-end maintenance costs will be $1,000 per year for the first 5 years, $2,000 per year for the next 10 years, and $3,000 per year for the last 5 years. Following is each vendor’s sales package. Vendor A: $55,000 cash at time of delivery and 10 year-end payments of $18,000 each. Vendor A offers all its customers the right to purchase at the time of sale a separate 20-year maintenance service contract, under which Vendor A will perform all year-end maintenance at a one-time initial cost of $10,000. Vendor B: Forty semiannual payments of $9,500…
Your company operates a fleet of light trucks that are used to provide contract delivery services. As the engineering and technical manager, you are analyzing the purchase of 55 new trucks as an addition to the fleet. These trucks would be used for a new contract the sales staff is trying to obtain. If purchased, the trucks would cost $21,200 each; estimated use is 20,000 miles per year per truck; estimated operation and maintenance and other related expenses (year-zero dollars) are $0.45 per mile, which is forecasted to increase at the rate of 5% per year; and the trucks are MACRS (GDS) three-year property class assets. The analysis period is four years; t = 38%;MARR = 15% per year (after taxes; includes an inflation component); and the estimated MV at the end of four years (in year-zero dollars) is 35% of the purchase price of the vehicles. This estimate is expected to increaseat the rate of 2% per year. Based on an after-tax, actual-dollar analysis, what is the uniform annual…
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Jake’s Shipping, Inc. needs to purchase a new fleet of light trucks for its shipping business. The firm is trying to decide whether to purchase trucks with diesel engines or trucks with gasoline engines. The diesel truck will have a useful life of 12 years, after which it will need to be replaced. The diesel truck costs $110,000 to purchase and its annual maintenance and operation costs will depend on the cost of regular maintenance/repairs and the cost of diesel fuel. In Years 1 through 5, its annual maintenance/repair costs are expected to be $2000 per year. In Years 6 through 12, its annual maintenance/repair costs are expected to be $2500 per year. The firm expects that the diesel truck will use 5,900 gallons of diesel fuel per year (Years 1 through 12) and believes that diesel fuel will cost $2.65 per gallon, on average, during the life of the truck. The gasoline truck only costs $60,000 to purchase but will have a useful life of only 4 years, after which it will need to be…
An automobile manufacturer is considering a change in an assembly line that should save moneyby reducing labor and material cost. The change involves the installation of four new robots thatwill automatically install windshields. The cost of the four robots, including installation and initial programming, is $400,000. Current practice is to amortize the initial cost of robots over two years on a straight-line basis. The process engineer estimates that one full-time technician will be needed to monitor, maintain, and reprogram the robots on an ongoing basis. This person will cost approximately $60,000 per year. Currently, the company uses four full-time employees on this job and each makes about $52,000 per year. One of these employees is a material handler, and this person will still be needed with the new process. To complicate matters, the process engineer estimates that the robots will apply the windshield sealing material in a manner that will result in a savings of $0.25 per…

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