W4_IBRAHEEM_PREFERRED OPERATING EQUIPMENT

1.0 Problem definition: 

There is a need to boost production by investing in additional equipment for a cassava processing plant. The period of functionality is 5years. Increased productivity will amounts to NGN500, 000 in revenue per annum after deduction of operating cost. A 5KVA power output is ideal for this extra energy requirement.

2.0 Development of feasible alternative:

The feasible alternatives to achieving desired objective of qualitative products can be obtained considering the following alternatives:

1. Purchase of a solar panel( roof-mounted) for effective power generation
2. Purchases of an engine driven generating set to supply power to the equipment over the given period.

The solar panel is assumed to have zero market value at the end of year 5. The generating set has a depreciation value calculated using straight line method of classical depreciation with a salvage value of NGN 500,000 over cost price of NGN2, 000,000(for 18kva capacity).

Following parameter applies:

 D_k = (B-SV_N)/N-                                Eqn. 1

D_k^* = k. D_k for 1≦k≦N                     Eqn. 2

BV_k = B-                D_k^*                        Eqn. 3

For the generating set:  B=2,000,000, 000, SV= 500,000, N=5years.

Substituting into equation 1, 2 and 3 above give numerical value populated in a spreadsheet below.

EOY,k	dk(NGN)	BVK (NGN)
0	-	2,000,000
1	900,000	1,700,000
2	900,000	900,000
3	900,000	1,400,000
4	900,000	800,000
5	900,000	500,000

3.0 Develop the outcome for each alternative:

The two scenarios will be subjected to numerical analysis using Present worth (PW) of the equipment to justify economic benefits of the investment. The Minimum attractive rate on investment (MARR) is 20% per year. The PW Decision rules suffices if PW (i=MARR) ≧0.

                                                                                                                                                      

    

Using information in the figure above,

PW= PW of cash flows-PW of cash outflows

PW (20%)            = 620,000(P/A, 20%, 5) + 100,000(P/F, 20%, 5)-2,000,000

                                = 55,122 NGN

Where P/A= 2.9906 and P/F= 0.4019 from appendix C for discrete table of values.

Calculating for solar panel (alternative 2),

For our 5-KW solar energy system costing $45,000(NGN 7,020,000), a useful life of 20years and salvage value of 1,755,000NGN at the end of year 5:

PW= PW of cash flows-PW of cash outflows

PW (20%)            = 620,000(P/A, 20%, 5) + 1,755,000(P/F, 20%, 5)-7,020,000 < 0 (-446049)

This signifies the solar panel is not economically justified.

4.0 Selection of acceptable Criteria:

Acceptable criteria will be based on justification on which of the two alternatives brings appreciable returns on investment in terms of economical justification. The Minimum attractive rate of return (MARR) of 20% is to be maintained based on consideration and company policy.

5.0 Analysis and Comparison of alternatives:

Item 3 above clearly indicate alternative 1 is of significant benefit in terms of PW value greater than 0.

6.0 Selection of preferred alternative:

The most preferred alternative is to procure an 18KVA (less phase factor) generator set for the extra power requirement.

7.0 Performance Monitoring & Post Evaluation of result:

Continual monitoring measures to be put in place to evaluate relationship between FW/PW, AW and equivalent capital recovery.

References:

Sullivan, W. G., Wicks, E.M., & Koelling, C.P. (2012). Engineering Economy (15^th ed.) (pp 201-210) New Jersey, NJ. Pearson Higher Education, Inc.

 Purdue OWL APA style. (2011). APA formatting and style guide. Retrieved from http://owl.english.purdue.edu/owl/resource/560/19/

 Green Econometrics (2007): Understanding the Cost of Solar Energy. Retrieved from http://greenecon.net/understanding-the-cost-of-solar-energy/energy_economics.html