Summary of costs by year - Alternative 2. -
Year 1:$15,980 + 479 + 2,397- 320 + 237
+ 600 + 0.095 x 11,496 = $1,500
+ 600 + 0.095 x 11,496 = $1,500
Years 2, 3, 4, 5:600 + 0.095 x 9,476 =
$1,500
$1,500
Years 6 to 15: 600 + 0.095 x 4,676 =
$1,044
$1,044
Year 15:600 + 0.095 x 4,676- 799 = $245
Use an interest rate of 8.91 percent (current
yield on long-term treasury bonds) to deter-
mine the present worth (P) of the costs of
the two alternatives.
yield on long-term treasury bonds) to deter-
mine the present worth (P) of the costs of
the two alternatives.
Cost Comparison, Conclusions, and Recommen-
dations
dations
The analysis shown on the discounting table
(table B) can be used to tell several important
economic facts about alternatives 1 and 2.
(table B) can be used to tell several important
economic facts about alternatives 1 and 2.
a. The present value of costs of alternative
1 ($58,723) is more than twice that of
alternative 2 ($27,424). Since the benefits
(services) of the two alternatives are the
same, alternative 2 (Government
ownership of the switchboard) is the most
economical scheme.
1 ($58,723) is more than twice that of
alternative 2 ($27,424). Since the benefits
(services) of the two alternatives are the
same, alternative 2 (Government
ownership of the switchboard) is the most
economical scheme.
b. Circular A-76 comparison criteria
(section 7b-3) require that Government
costs be at least 10 percent less than
leased circuit costs before a Government-
owned system can be installed. The ratio of
leased circuit costs to adjusted
Government-owned costs is therefore
(section 7b-3) require that Government
costs be at least 10 percent less than
leased circuit costs before a Government-
owned system can be installed. The ratio of
leased circuit costs to adjusted
Government-owned costs is therefore
58,723
27,424 x 1.10
1.95
=
Clearly, alternative 2 meets the economic
test for being the preferred system.
test for being the preferred system.
c. What would happen if the projected 15-
year service life for the equipment is too
long? Note that the total present value of
costs for alternative 1 exceeds those of
alternative 2 in the 3rd year of the study. This
indicates that should obsolescence or other
year service life for the equipment is too
long? Note that the total present value of
costs for alternative 1 exceeds those of
alternative 2 in the 3rd year of the study. This
indicates that should obsolescence or other
factors make switchboard replacement
desirable after only 4 years (for example),
alternative 2 is still the preferred economic
scheme. This is a comfortable margin for
error in service-life estimation.
desirable after only 4 years (for example),
alternative 2 is still the preferred economic
scheme. This is a comfortable margin for
error in service-life estimation.
We conclude that the economic analysis shows
considerable savings for Reclamation ownership of
the switchboard. However, our final recom-
mendations must depend upon other factors as
well. Are Government maintenance forces ade-
quately staffed and training to provide this service?
Do management policies permit installation of a
Government-owned system? If the answers to such
questions are yes, one can strongly recommend
that alternative 2 be Implemented.
considerable savings for Reclamation ownership of
the switchboard. However, our final recom-
mendations must depend upon other factors as
well. Are Government maintenance forces ade-
quately staffed and training to provide this service?
Do management policies permit installation of a
Government-owned system? If the answers to such
questions are yes, one can strongly recommend
that alternative 2 be Implemented.
5.2. Justification for warehouse docking facili-
ties at the Big Water Project Headquarters. -
ties at the Big Water Project Headquarters. -
· Problem.- The maintenance manager is
evaluating the feasibility of building loading
docks for the warehouse at Big Water
Project Headquarters. The building does not
have docks and warehousing activities are
tedious and expensive. The manager
evaluates the lost time and concludes that
these docks will save $10,000 annually. The
docks will cost $50,000 and take 1 year to
complete. The new docks are estimated to
have a service life of 7 years. The current
annual interest rate is 10 percent. The
maintenance manager determines that
adequate funds can be programmed for the
docks, but wants to ensure the expenditure
can be economically justified. The following
study is performed.
evaluating the feasibility of building loading
docks for the warehouse at Big Water
Project Headquarters. The building does not
have docks and warehousing activities are
tedious and expensive. The manager
evaluates the lost time and concludes that
these docks will save $10,000 annually. The
docks will cost $50,000 and take 1 year to
complete. The new docks are estimated to
have a service life of 7 years. The current
annual interest rate is 10 percent. The
maintenance manager determines that
adequate funds can be programmed for the
docks, but wants to ensure the expenditure
can be economically justified. The following
study is performed.
Benefit/Cost Comparisons, Conclusions, and
Recommendations
Recommendations
present value of costs ($45,450) exceeds that
of benefits ($44,230) over the study period.
Therefore, it would not be economical to build
the dock facilities. Other factors such as
safety, anticipated staff cuts, etc., will also
have a significant influence on the decision.
Note the following from the discounting table:
of benefits ($44,230) over the study period.
Therefore, it would not be economical to build
the dock facilities. Other factors such as
safety, anticipated staff cuts, etc., will also
have a significant influence on the decision.
Note the following from the discounting table:
a. The 1-year delay in accruing savings (study
year 2 rather than study year 1) caused the
adverse economic study result, if a way could
be found to shorten the construction time, the
year 2 rather than study year 1) caused the
adverse economic study result, if a way could
be found to shorten the construction time, the
(FIST 4 - 3) 8