The Kuwait petroleum company wants to make a sealing solution for machine shaft

Question

The Kuwait petroleum company wants to make a sealing solution for machine shaft surfaces that have been compromised by abrasion, high pressures, or inadequate lubrication, is considering adding metal-based nanoparticles of either type Al or Fe to its solution to increase the product's performance at high temperatures. The costs associated with each are shown below. The company's MARR is 18% per year, using a PW-based rate of return analysis Determine which nanoparticle type the company should select.

Explanation / Answer

Solution:

The company should select Tyoe Fe as the equivalent annual cost is less for this machine.

Type Fe Time 0 1 2 Initial Cost -60,000 Annual Cost -45000 -45000 Residual Value 12,000 Net cashflows -60,000 -45,000 -33,000 18 % dicsount factors 0.847 0.718 0.609 Present Values - 50,847.46 - 32,318.30 - 20,084.82 Net present Value -    103,250.58 Equivalent Annual Cost = Net present Value / PVAF for 2 years (103250.58) / 2.174 = -47,487.40

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