A mechanical engineer must recommend an A/C system to a commercial building owne

Question

A mechanical engineer must recommend an A/C system to a commercial building owner. The owner intends to own the building for at least 10 years. A conventional split system has a design life of 10 years, a cost of $50,000, and annual operating costs of $15,000. A chilled water system has a design life of 10 years, an initial cost of $64,000, and annual operating costs of $12,000. Using a rate of return of 9%, determine the present worth index of the incremental investment up to the chilled water system. Express your answer to two decimal places.

Explanation / Answer

Solution:

1) Incremental Intitial Cost in Chilled Water System from Covenstional Split System ($64,000 - $50,000) = $14,000

2) Incremental Saving in Annual Operating Costs in Chilled Water System from Covenstional Split System ($15,000 - $12,000) = $3,000

3) PVIFA (9%, 10) = 6.41766

4) Present Value of Annual Cost Saving = $3,000 x 6.41766 = $19,253

5) Present Worth Index = Present Value of Annual Cost Saving / Present Value of Incremental Intial Cost = $19,253 / $14,000 = 1.375 or 1.38 times

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