Question

LO A Shape Fill AVAa Convert to Picture Shapes Text Box Arrange Quick Styles Shape Out SmartArt Example 5.9 A corporate jet costs $1,350,000 and will incur $200,000 per year in fixed costs (maintenance, licenses, insurance, and hangar rental) and $277 per hour in variable costs (fuel, pilot expense, etc.). The jet will be operated for 1,200 hours per year for five years and then sold for $650,000. The MARR is 15% per year. a) Determine the capital recovery cost of the jet. b) What is the EUAC of the jet?

Answer 1

Capital cost=$1350000

Salvage Value=$650000

Time=5 years

MARR=15%

PV of salvage value = 650000/(1+15%)^5 = 650000/1.15^5 = 650000/2.0114 = $323164.88

Net Capital cost = 1350000-323164.88 =$1026835.12

Annual Worth of Capital cost will be given by, PV=*(1-(1+r)^-n)/r

or, 1026835.12 = A*(1-(1+15%)^-5)/15%

or, 1026835.12 = A*(1-(1.15)^-5)/0.15

or, 1026835.12 = A*(1-0.4972)/0.15

or, 1026835.12 = A*0.5028/0.15

or, A=1026835.12 *0.15/0.5028

or, A = $306320.89

Hence Capital Recovery Cost = $306320.89

Variable cost for 1200 hours=1200*277=$332400

Total Annual Cost =200000+332400=$532400

Hence Total EUAC = 306320.89+532400 = $838720.89