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EUAC Comparison for Equipment Selection

This document discusses the annual worth method for comparing alternatives. It involves converting all cash flows to equivalent uniform annual costs to calculate the EUAC for each alternative over the same life cycle. The alternative with the lowest EUAC is preferred. The document provides an example problem comparing two equipment options (A and B) for a manufacturing plant based on initial cost, annual operating costs, labor costs, taxes, and a 15% minimum attractive rate of return (MARR) over a 10 year period. It calculates the EUAC for each alternative and determines that Alternative B has a lower EUAC of P126,070 compared to P129,860 for Alternative A, making B the more economical choice.

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Riko Aida
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269 views8 pages

EUAC Comparison for Equipment Selection

This document discusses the annual worth method for comparing alternatives. It involves converting all cash flows to equivalent uniform annual costs to calculate the EUAC for each alternative over the same life cycle. The alternative with the lowest EUAC is preferred. The document provides an example problem comparing two equipment options (A and B) for a manufacturing plant based on initial cost, annual operating costs, labor costs, taxes, and a 15% minimum attractive rate of return (MARR) over a 10 year period. It calculates the EUAC for each alternative and determines that Alternative B has a lower EUAC of P126,070 compared to P129,860 for Alternative A, making B the more economical choice.

Uploaded by

Riko Aida
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

COMPARING

ALTERNATIVES
(Annual Worth Method)
In this method, all cash flow (irregular or uniform)
must be converted to an equivalent annual cost, that is, a
year-end amount which is the same each year. The
alternative with the least equivalent uniform annual cost
if preferred. When the EUAC method is used, the
equivalent uniform annual cost of the alternatives must
be calculated for one life cycle only. This method is
flexible and can be used for any type of alternative
selection problems. The method is a modification of the
annual cost pattern.
SAMPLE PROBLEM
• A company is considering two types of equipment for its Manufacturing Plant.
Pertinent data are as follows.

A B
First Cost P200,000 P300,000
Annual operating P32,000 P24,000
cost
Annual labor cost P50,000 P32,000
Insurance and 3% 3%
property taxes
Payroll taxes 4% 4%
• Estimated Life is 10 years
• MARR = 15%
Alternative A
• Annual Cost = P32,000 + P50,000 + (P50,000)(0.04)+
(P200,000)(0.03)
0
= P1
90, 000 10

P90,000
P200,000

0 1 10

EUAC
Alternative B
• Annual Cost = P24,000 + P32,000 + (P32,000)(0.04)+
P300,000)(0.03)
0
= 1P 66,280 10

P66,280
P300,000

0 1 10

EUAC
• Alternative A

0.15
EUAC= (P200,000)( )+ P90,000
1−(1+0.15)−10
= P129,860

Alternative B

0.15
EUAC = (P300,000)( )+ P66,280
1−(1+0.15)−10
= P126,070

Since EUACB < EUACA ; Alternative B is more economical

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