Questions

7.4. Using a nominal annual interest rate of 15%, find the effective annual interest rate if
compounding is (1) annual, (2) quarterly, (3) monthly, and (4) continuous. For uniform annual
payments of $10000 for 10 years, compare the compound amount accumulated at the end of 10
years under (1) through (4).
𝑖
𝑖𝑒𝑓𝑓 = (1 + 𝑝)𝑝 -1

(1) annual p=1 i=0,15

0,15 1
𝑖𝑒𝑓𝑓,1 = (1 + ) − 1 = 0,15 = %15
1
(2) quarterly p=4 i=0,15
0,15 4
𝑖𝑒𝑓𝑓,2 = (1 + ) − 1 = 0,159 = %15,9
4
(3) monthly p=12 i=0,15
0,15 12
𝑖𝑒𝑓𝑓,3 = (1 + ) − 1 = 0,161 = %16,1
12
(4) continious p=∞
𝑖𝑒𝑓𝑓 = 𝑒 𝑖 − 1 = 𝑒 0,15 − 1 = 0,162 = %16,2
A=10000 $
𝑛
(1+𝑖𝑒𝑓𝑓 ) −1
𝐹=𝐴 𝑖𝑒𝑓𝑓

(1+0,15)10 −1
(1) 𝐹 = 10000 = $ 203037,182
0,15
(1+0,159)10 −1
(2) 𝐹 = 10000 = $ 212173,123
0,159
(1+0,161)10 −1
(3) 𝐹 = 10000 = $ 214261,649
0,161
(1+0,162)10 −1
(4) 𝐹 = 10000 = $ 215314,021
0,162

7.12. Another boiler must be added to the steam-generating system of a small plant. Two boiler
manufacturers have submitted bids from which the following information is obtained.
Boiler A Boiler B
First Cost ($) 50000 120000
Salvage Value ($) 10000 20000
Useful Life (years) 20 40
Annual Operating Cost ($) 9000 6000
 If the minimum acceptabie rate of return is 10%, which boiler should be purchased?

When two options’ useful lives are different, the planning horizons (or planning period) are
transformed to a common multiple of the lives. In this question, the useful lives become 40
years for each boilers.

Boiler A
10000 10000

1 2 3 4 5 20 40
…… ……………..
9000 9000 9000 9000 9000 9000 9000 9000
9000
50000
50000

Boiler B
20000

1 2 3 4 5 20 40
…… ……………..
6000 6000 6000 6000 6000 6000 6000 6000 6000

120000

The present value teorem is used for the calculation. The following equations are also used;
1
𝑃=𝐹
(1 + 𝑖)𝑛
(1 + 𝑖)𝑛 − 1
𝑃=𝐴
𝑖(1 + 𝑖)𝑛
𝑃 𝑃
𝑃𝑉𝐴 = 50000 + 50000 ( , 0.10,20) + 9000 ( , 0.10,40)
𝐹 𝐴
𝑃 𝑃
− [10000 ( , 0.10,20) + 10000 ( , 0.10,40)]
𝐹 𝐹

1
 𝑃 𝑃
𝑃𝑉𝐵 = 120000 + 6000 ( , 0.10,40) − 20000 ( , 0.10,40)
𝐴 𝐹

1 (1 + 0,10)40 − 1
𝑃𝑉𝐴 = 50000 + 50000 + 9000
(1 + 0,10)20 0,10(1 + 0,10)40
1 1
− [10000 20
+ 10000 ] = $143736,252
(1 + 0,10) (1 + 0,10)40

(1 + 0,10)40 − 1
𝑃𝑉𝐵 = 120000 + 6000
0,10(1 + 0,10)40
1
−20000 = $178232,406
(1 + 0,10)40
𝑃𝑉𝐴 < 𝑃𝑉𝐵 so Boiler A should be purchased.
7.5. For the cogeneration system case study, calculate the levelized annual costs associated with
carrying charges, operation and maintenance, and fuel using the following simplified model:
(1) The purchased-equipment costs should be calculated from the functions and constants given
in Appendix B. These values are expressed in mid-1994 dollars.
(2) The average annual inflation rate is 4.0%; the average nominal escalation rate of all (except
fuel) costs is 4.0%, and the average nominal escalation rate of the natural gas (CH4) cost is
4.2%. The economic life is 20 years, the average annual cost of money is 12.0%, and the average
capacity factor is estimated to be 90%. The unit cost of fuel is 3.0 mid-1994 dollars per GJ
lower heating value.
(3) The effects of taxes, insurance, and financing of capital expenditures are neglected.
(4) Overnight construction is assumed (i.e., the allowance for funds used during construction is
zero).
(5) Startup costs, working capital, and costs of licensing, research, and development are
assumed to be zero.
(6) The total capital investment (TCI) is four times higher than the sum of purchased-equipment
costs expressed in mid- 1997 dollars.
5

𝑇𝐶𝐼 = 4.0 ∑(𝑃𝐸𝐶)𝑘

𝑘=1

(7) Commercial operation of the plant starts on January 1, 1998. The purchased-equipment
costs will be escalated with the inflation rate.
(8) The annual operating and maintenance expenses (expressed in mid-1997 dollars) are
estimated to be 20% of the total purchasedequipment costs expressed in mid- 1997 dollars:

2
 5
𝑂𝑀
𝑍 = 0.20 ∑(𝑃𝐸𝐶)𝑘
𝑘=1

(9) The annual levelized carrying charges are obtained by multiplying the total capital
investment by the capital-recovery factor.
(10) The annual levelized operating and maintenance costs are obtainedmby multiplying the
O&M costs in mid-1997 dollars by themconstant escalation levelization factor. Calculate in
current dollars for a 20-year period the annualized levelized
(a) carrying charges, (b) operating and maintenance costs, and (c) fuel costs.

Parameter
Average general inflation rate (%) 4.0
Average nominal escalation rate of all (except fuel) costs (%) 4.0
Average nominal escalation of natural gas costs (%) 4.2
Beginning of the design and construction period Jan 1. 1998
Date of commercial operation Jan 1. 1998
Plant economic life (years) 20
Average capacity factor (%) 90.0
Unit cost of fuel ($/GJ-LHV) 3.0
Lower Heating Value of Fuel LHV (MJ/kg) 50,01

In order to calculate the levelized annual costs associated with carrying charges, operation and
maintenance, and fuel; the following equations shoul be used.
𝑛
𝐴 𝑖𝑒𝑓𝑓 (1 + 𝑖𝑒𝑓𝑓 )
𝐶𝑅𝐹 = =
𝑃 (1 + 𝑖𝑒𝑓𝑓 )𝑛 − 1

𝐴 𝑘(1 − 𝑘 𝑛 )
𝐶𝐸𝐿𝐹 = = 𝐶𝑅𝐹
𝑃0 1−𝑘
1 + 𝑟𝑛
𝑘=
1 + 𝑖𝑒𝑓𝑓
𝐶𝐶𝐿,𝐶𝑈 = 𝑇𝑅𝑅𝐿,𝐶𝑈 − 𝐹𝐶𝐿,𝐶𝑈 − 𝑂𝑀𝐶𝐿,𝐶𝑈
𝐹𝑢𝑒𝑙 𝐶𝑜𝑠𝑡𝑠
= 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑓𝑢𝑒𝑙 𝑥 𝑙𝑜𝑤𝑒𝑟 ℎ𝑒𝑎𝑡𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑓𝑢𝑒𝑙 𝑥 𝑓𝑢𝑒𝑙 𝑚𝑎𝑠𝑠 𝑓𝑙𝑜𝑤 𝑟𝑎𝑡𝑒 𝑥 𝑎𝑣𝑒𝑟𝑎𝑔𝑒
𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑓𝑎𝑐𝑡𝑜𝑟 𝑥 365 𝑑𝑎𝑦𝑠 𝑥 24 ℎ𝑜𝑢𝑟𝑠
$ 𝑀𝐽 𝑘𝑔 ℎ
= 0,003 𝑥50,01 𝑥1,6419 𝑥0,90𝑥365𝑥24 𝑥 3600 𝑠
𝑀𝐽 𝑘𝑔 𝑠 𝑦𝑒𝑎𝑟
$
= 6,991 𝑥 106 𝑚𝑖𝑑 1994
𝑦𝑒𝑎𝑟

3
 $
𝐹𝐶 = 6,991 𝑥 106 𝑥 (1 + 0,042)4 = 8,241𝑥 106 𝑚𝑖𝑑 1998
𝑦𝑒𝑎𝑟
levelized annual fuel costs in current dollars
1 + 𝑟𝑛 1 + 0,042
𝑘𝐹 = = = 0,93036
1+𝑖 1 + 0,12

0,12(1 + 0,12)20
𝐶𝑅𝐹𝐹 = = 0,13388
(1 + 0,12)20 − 1
𝑘(1 − 𝑘 𝑛 )
𝐹𝐶𝐿,𝐶𝑈 = 𝐶𝑅𝐹
1−𝑘
0,93036(1 − 0,9303620 )
= 𝑥0,13388 𝑥8,241𝑥 106 𝑥 (1 + 0,042)−1
1 − 0,93036
= 10,805 𝑥 106 𝑚𝑖𝑑 1997 𝑑𝑜𝑙𝑙𝑎𝑟𝑠
1 + 0,04
𝑘𝑂𝑀 = = 0,92857
1 + 0,12
𝐶𝑅𝐹𝑂𝑀 = 0,13388
0,92857(1 − 0,9285720 )
𝑂𝑀𝐶𝐿,𝐶𝑈 = 0,13388𝑥 𝑂𝑀𝐶
1 − 0,92857