Contemporary Engineering Economics, 4 th edition, © 2007 Capital Costs versus Operating Costs Lecture No.20 Chapter 6 Contemporary Engineering Economics Copyright © 2006

Contemporary Engineering economics, 4 th edition, © 2007 Annual Equivalent Cost When only costs are involved, the AE method is called the annual equivalent cost. Revenues must cover two kinds of costs: Operating costs and capital costs. Capital costs Operating costs + Annual Equivalent Costs

Contemporary Engineering economics, 4 th edition, © 2007 Capital (Ownership) Costs Def: Owning an equipment is associated with two transactions—(1) its initial cost (I) and (2) its salvage value (S). Capital costs: Taking these items into consideration, we calculate the capital costs as: N 0 N I S CR(i)

Contemporary Engineering economics, 4 th edition, © 2007 SEGMENTBEST MODELSASKING PRICE PRICE AFTER 3 YEARS Compact carMini Cooper$19,800$12,078 Midsize carVolkswagen Passat $28,872$15,013 Sports carPorsche 911$87,500$48,125 Near luxury carBMW 3 Series$39,257$20,806 Luxury carMercedes CLK$51,275$30,765 MinivanHonda Odyssey $26,876$15,051 Subcompact SUVHonda CR-V$20,540$10,681 Compact SUVAcura MDX$37,500$21,375 Full size SUVToyota Sequoia$37,842$18,921 Compact truckToyota Tacoma$21,200$10,812 Full size truckToyota Tundra$25,653$13,083 Capital (Ownership) Costs Associated with Various Vehicles

Contemporary Engineering economics, 4 th edition, © 2007 Example - Capital Cost Calculation for Mini Cooper Given: I = $19,800 N = 3 years S = $12,078 i = 6% Find: CR(6%) $19,800 $12,

Contemporary Engineering economics, 4 th edition, © 2007 Example 6.4 Required Annual Revenue to Justify an Investment Given:I= $20,000,S= $4,000,N= 5 years,i= 10% Find: see if an annual revenue of $5,000 is large enough to cover the capital cost and operating cost $20,000 $4, $500 Operating cost Capital cost

Contemporary Engineering economics, 4 th edition, © 2007 Solution: Need Additional Revenue in the Amount of $ to justify the Investment