CASE STUDY THE CHANGING SCENE OF AN ANNUAL WORTH ANALYSIS Background and Information Harry, owner of an automobile battery distributorship in Atlanta, Georgia, performed an economic analysis 3 years ago when he decided to place surge protectors in-line for all his major pieces of testing equipment. The estimates used and the annual worth analysis at MARR 15% are summarized below. Two different manufacturers protectors were compared. PowrUp -26,000 Lloyd's -36,000 Cost and installation, $ Annual maintenance cost, -800 -300 $ per year Salvage value, $ 2,000 3,000 25,000 Equipment repair savings, $ Useful life, years 35,000 10 The spreadsheet in Figure 6-9 is the one Harry used to make the decision. Lloyd's was the clear choice due to its substan- tially larger AW value. The Lloyd's protectors were installed. During a quick review this last year (year 3 of operation). it was obvious that the maintenance costs and repair savings MARR 15% 2 3 PowrUp Annual 4 Investment 5 Year and salvage -26,000 6 0 maintenance 0 -800 7 1 0 8 2 0 -800 9 3 0 -800 10 4 -800 11 5 0 -800 12 6 2,000 -800 13 14 8 15 9 16 10 17 AW element -6,642 -800 18 Total AW 17,558 Figure 6-9 Annual worth analysis of surge protector alternatives, case study. 0 have not followed (and will not follow) the estimates made 3 years ago. In fact, the maintenance contract cost (which in- cludes quarterly inspection) is going from $300 to $1200 per year next year and will then increase 10% per year for the next 10 years. Also, the repair savings for the last 3 years were $35.000, $32,000, and $28,000, as best as Harry can deter- mine. He believes savings will decrease by $2000 per year hereafter. Finally, these 3-year-old protectors are worth noth- ing on the market now, so the salvage in 7 years is zero, not $3000. Case Study Exercises 1. Plot a graph of the newly estimated maintenance costs and repair savings projections, assuming the protectors last for 7 more years. 2. With these new estimates, what is the recalculated AW for the Lloyd's protectors? Use the old first cost and maintenance cost estimates for the first 3 years. If these estimates had been made 3 years ago, would Lloyd's still have been the economic choice? 3. How has the capital recovery amount changed for the Lloyd's protectors with these new estimates? Lloyd's Investment Annual Repair savings 0 25,000 Repair savings and salvage maintenance 0 -36,000 0 0 -300 35,000 25,000 0 -300 35,000 25,000 0 -300 35,000 25,000 0 -300 35,000 25,000 0 -300 35,000 25,000 0 -300 35,000 -300 35,000 -300 35,000 -300 35,000 -300 35,000 25,000 -300 35,000 $ 27,675 0 0 0 3,000 -7,025