Question

The purchasing department for Eversource Electric asked its operations and maintenance engineering department for its advice for selecting a new motor of its Distributed Control Center fan. The choices are: 1) Choice one is an electric motor that is rated at 10 Horsepower (HP) and costs $1,200. Its full load efficiency is specified by its supplier to be 85%. 2) Another bidder is proposing a high-efficiency motor of the same size, which has an efficiency of 90% but it costs $1,600. The specification developed by the project team identified that the motors will operate at a rate of 10 HP output for 2,000 hours a year, and the cost of energy will be $ 0.09 per kilowatt-hour. Each motor is expected to have a 15 year life. At the end of 15 years, the first motor will have a salvage value of $50 and the high efficiency motor will have a salvage value of $100. Considering the company's stated MARR is 8% and that it is the company's policy to evaluate bids using the NPW criterion, what should be the engineering department's recommendation? (Note: 1 HP = 0.7457 kW)

Answer 1

The choice 1 motor is rated at 85%, so it means if its rated 10HP, it will actually consume

10/.85=11.765HP. Since one HP is .7457kW, it means for motor A

11.765*.7457= 8.77316kW. So, the cost per hour for it would be

8.77316*.09= $0.7896 per hour.

Since the motor will operate for 2000 hours an year,

yearly cost=2000*0.7896=$1579.2 per year

Similarly, for motor 2

Cost per hour=(10/.9)*.7457*.09*2000= 1491.4 per year.

With this information, we can create the cashflow for all 15 years. This is shown below.

Year 0 1 Motor 2 - 1500 - 1491.4 -1491.4 - 1491.4 - 1491.4 2 3 4 Motor 1 - 1200 - 1579.2 - 1579.2 - 1579.2 - 1579.2 - - 1579.2 - 1579.2 - 1579.2 - - 1579.2 - - 1579.2 - 1579.2 5 - 1491.4 6 7 - 1491.4 - 1491.4 00 a -1491.4 -1491.4 -1491.4 10 11 - 1579.2 -1491.4 12 - 1579.2 - 1491.4 13 - 1579.2 -1491.4 14 - 1579.2 - 1491.4 15 - 1529.2 - 1391.4 | -14701.37 -14234.08 NPW

The NPW is also shown. Its been calculated by the formula =NPV(interest rate,cashflows)+initial investment.

It can also be calculated manually by the following formula-

Cash flow NPV = – initial investment (1+i) where: i = Required return or discount rate t = Number of time periods

As we can see, motor 2 has a higher NPW. Hence, motor 2 should be recommended.