An airline is considering two types of engine systems

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Reference no: EM132032647

"An airline is considering two types of engine systems for use in its planes. Each has the same life and the same maintenance and repair record.

SYSTEM A costs $107,000 and uses 26,000 gallons of fuel per 1,800 hours of operation at the average load encountered in passenger service.

SYSTEM B costs $214,000 and uses 18,000 gallons of fuel per 1,800 hours of operation at the same level.

Both engine systems have three-year lives. Each system's salvage value is 9.9% of its initial investment. If jet fuel currently costs $2.67 a gallon and fuel consumption is expected to increase at the rate of 7.2% per year because of degrading engine efficiency, which engine system should the firm install? Assume 2,500 hours of operation per year and a MARR of 11.1%. Use the annual equivalent cost criterion. What is the annual equivalent cost of the preferred engine?"

Reference no: EM132032647

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