Reference no: EM132028723
An airline is choosing between two engine systems for its planes. Each has the same useful life and the same repair record and maintenance costs.
System A costs US$2 million and uses 30,000 gallons per 1,000 hours of operation at the average load of passenger service.
System B costs US$3 million and uses 20,000 gallons per 1,000 hours of operation at the same level of passenger service.
In addition, the following information is relevant to both engine systems:
Both systems have four-year lives before any major overhaul is required. At the end of the fourth year, each system has a salvage value equal to 10% of its initial investment.
The fuel consumption of both systems is expected to increase at a rate of 5% per year because of degrading engine efficiency.
The price of jet fuel on 31 March 2017 was US$15 per gallon. The airline will use this price to evaluate the two systems.
The airline will assume 2,000 hours of operation per year and use a MARR of 10%.
Use the annual worth (AW) method to compare the two engine systems. Which one should the airline choose? Explain your answers in the following steps:
a) Calculate the annual equivalent cost of fuel (AWA (10%)fuel) for System A.
b) Calculate the total annual equivalent cost (AWA (10%)) of System A.
c) Calculate the annual equivalent cost of fuel (AWB (10%) fuel) for System B.
d) Calculate the total annual equivalent cost (AWB (10%)) of System B.
e) State your conclusion.
f) If the airline expects the price of jet fuel to rise significantly in the near future, will it make the same choice? Explain your answer briefly without any calculation.