Two electric motors are being considered for installation in elevator system. Bo

Question

Two electric motors are being considered for installation in elevator system. Both have 5 years life and an interest rate of 10% per year. At what number of hours of annual usage would the decision maker be indifferent between the two motors?

1. Two motors are being considered for installation in an elevator system. Both have a 5-year life and interest cost is 10% per year. At what number of hours of annual usage would the decision-maker be indifferent between the two motors ? (15) Motor A Motor B $4500 $0.20 $1750 First cost Operating cost/hour SV $5500 $0.18 $2700

Explanation / Answer

To be indifferent to the choice of motors, present worth of both the motors should be same

Let no. of hours be h

PW of motor A = Intial cost + PW of operationg cost - PW of salvage value = 5500 - 2700/(+0.1)^5 + 0.18*h/(1+.1)^1 + 0.18*h/(1+.1)^2 +0.18*h/(1+.1)^3 +0.18*h/(1+.1)^4 +0.18*h/(1+.1)^5 = 5500 - 1676.49 +0.18*h*3.79 = 3823.51 + .682*h

PW of motor B = Intial cost + PW of operationg cost - PW of salvage value = 4500 - 1750/(+0.1)^5 + 0.2*h/(1+.1)^1 + 0.2*h/(1+.1)^2 +0.2*h/(1+.1)^3 +0.2*h/(1+.1)^4 +0.2*h/(1+.1)^5 = 4500 - 1086.61 +0.2*h*3.79 = 3413.39 + .758*h

PW of motor A = PW of motor B i.e. 3823.51+0.68h = 3413.39+0.758h so 410.12 = 0.076h

so h= 5396 hours per year

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