3a) An environmental engineer is considering purchasing clarifier system, which

ID: 2799229 • Letter: 3

Question

3a) An environmental engineer is considering purchasing clarifier system, which can either be semi-automatic automatic. The estimates for each are as toll new ows : Semi-automatic Fully Automatic Pirst Cost Annual Disbursement Salvage Value Life $75,000 $20,000 $ 4,000 s 100, 000 $ 25,000 $ 10,000 s yrs 10 yrs Determine which machine should be selected if the MARR is 15. Note the project lives commensurate if you will use the present worth method for aiternatives evaluation. Draw a detailed cash flow diagram. 3b) An environmental engineer earned $5,000 in 1960. Today in 2017, a similarly experienced environmental engineer earns $90.000 Compute the inflation rate associated with the remuneration of environmental engineers under the above scenario.

Explanation / Answer

Answer

Cost of Capital = 15%

Semi – Automatic

Fully – Automatic

First Cost

75,000

100,000

Annual Disbursement

20,000

25,000

Salvage value

4,000

10,000

Life

5 Yrs

10 Yrs

PVF

@15% of 5th Year

0.497

@15% of 10th Year

0.247

PVAF

@15% for 5 Years

3.352

@15% for 10 Years

5.018

Present Value of Cash Ouflows

= First Cost + (Annual Disbursement * PVAF of relevant year) – (Salvage Value * PVF of required year)

Semi-Automatic = 75,000 + (20,000 * 3.352) – (4,000 *0.497)

Semi-Automatic = 140,052

Fully Automatic = 100,000 + (25,000 * 5.018) – (10,000 *0.247)

Fully Automatic = 222,980

As we can see that useful life of machine is not equal, so to find which machine to choose we have to find Equalized Cash outflow per year.

= Present Value of Cash outflow / PVAF of that required machine

Semi-Automatic = 140,052 / 3.352

Semi-Automatic = 41,781.62

Fully Automatic = 222,980 / 5.018

Fully Automatic = 44,436.03

It is recommended to choose Semi-Automatic machine as Cash outflow is low in comparison to Fully automatic machine.