value is used in an economic study as a
"benefit" which accrues to the organization in
the study year that it is salvaged. When in
doubt, assume a zero salvage value at the
end of the service life. Salvage value, when
used, is discounted for the appropriate future
year in order to determine its real economic
benefit. Example:
"benefit" which accrues to the organization in
the study year that it is salvaged. When in
doubt, assume a zero salvage value at the
end of the service life. Salvage value, when
used, is discounted for the appropriate future
year in order to determine its real economic
benefit. Example:
·
Problem.- An office computer has been
purchased and installed for $5,000,000. Its
terminal value 8 years later is estimated to be
$50,000. What economic benefit does this
value have? Assume an 8-percent interest
rate.
purchased and installed for $5,000,000. Its
terminal value 8 years later is estimated to be
$50,000. What economic benefit does this
value have? Assume an 8-percent interest
rate.
·
Solution.- The present worth of the com-
puter salvage value is:
puter salvage value is:
P =
$50,000
(1 0.08)
8
+
= $27,013
5. EXAMPLES AND SOLUTIONS OF
MAINTENANCE PROBLEMS
We will now make economic analyses of actual
problems which are typical of those which are
faced by Reclamation maintenance managers.
Only the names are fictitious. Complete solutions
are shown to illustrate the basic concepts dis-
cussed above.
problems which are typical of those which are
faced by Reclamation maintenance managers.
Only the names are fictitious. Complete solutions
are shown to illustrate the basic concepts dis-
cussed above.
5.1. Replacement of the telephone cord
board at Glen Echo Powerplant.-
·
Problem.- The maintenance manager is
considering replacing the existing leased
Type 555 cord board at Glen Echo
Powerplant. This unit is old, obsolete,
and cumbersome to operate. Also, the
local telephone company has stated that
the Type 555 is no longer in production
and maintenance is difficult due to lack of
parts. Clearly, the useful life of this
equipment is over. The manager intends
to replace it with a modern 40-line PABS
switchboard and has asked for price
quotations both from the telephone
company and a private equipment
supplier. The manager must now prepare
a cost comparison, using rules defined in
considering replacing the existing leased
Type 555 cord board at Glen Echo
Powerplant. This unit is old, obsolete,
and cumbersome to operate. Also, the
local telephone company has stated that
the Type 555 is no longer in production
and maintenance is difficult due to lack of
parts. Clearly, the useful life of this
equipment is over. The manager intends
to replace it with a modern 40-line PABS
switchboard and has asked for price
quotations both from the telephone
company and a private equipment
supplier. The manager must now prepare
a cost comparison, using rules defined in
Treasury Department Circular A-76, to
determine which of the following
alternatives will produce the greatest
savings to the Government: Alternative 1
- Lease the new PABS from the
telephone company; or Alternative 2 -
Reclamation purchase, Install, and
maintain the equipment.
determine which of the following
alternatives will produce the greatest
savings to the Government: Alternative 1
- Lease the new PABS from the
telephone company; or Alternative 2 -
Reclamation purchase, Install, and
maintain the equipment.
· Solution.- Alternative 1 - Leased
service option from the telephone
company. The company offers leased
service under the following conditions.
company. The company offers leased
service under the following conditions.
Tier A, full rent. - Five-year period
$650 monthly recurring charge.
$650 monthly recurring charge.
Tier B, reduced rent.- After 5 years,
the rent will reduce to $250 per
month until terminated by
Reclamation. On termination, there
will be a one-time charge of $1,000
to remove the company's
equipment.
the rent will reduce to $250 per
month until terminated by
Reclamation. On termination, there
will be a one-time charge of $1,000
to remove the company's
equipment.
Main station charge. - $2.20 per
main station per month. Maximum
of 40 stations at $2.20 each = $88
monthly recurring charge for the
duration of the lease.
main station per month. Maximum
of 40 stations at $2.20 each = $88
monthly recurring charge for the
duration of the lease.
Contract administration charge.-
$620 annual recurring charge.
$620 annual recurring charge.
Installation charge.- One-time
nonrecurring charge: $2,000.
nonrecurring charge: $2,000.
Summary of costs by year- Alternative 1. -
Year 1:2,000 + 12 x (650 + 88) + 620
= $11,476
Years 2, 3, 4, 5:12(650 + 88) + 620
= $9,476
Year 6 to termination year: 12(250 + 88)
+ 620 = $4,676
Termination year: 1,000 + 12(250 + 88)
+ 620 = $5,676
Alternatives 1 and 2 will be designed
to provide identical service; hence the
benefits are assumed to be equal.
to provide identical service; hence the
benefits are assumed to be equal.
(FIST 4 - 3)
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