Budget Problems M17, 1-2; M18, 1-2; M19, 1-3; M20, 1-2; M21, 1-2 Questions Type your name here, Last Name First 18.2. The city administration is con

Budget Problems M17, 1-2; M18, 1-2; M19, 1-3; M20, 1-2; M21, 1-2 Questions

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18.2. The city administration is considering refurbishing the lighting system of its administration building. After an initial investigation, the city procurement office has narrowed down the choices to the following two options:

¨ Option 1 is an Ergolight system that costs $500,000 to purchase and install. The energy cost for option 1 is $20,000, and its maintenance cost is $2,000.

¨ Option 2 is a conventional system that costs $100,000 to purchase and install. The energy cost for option 2 is $50,000, and its maintenance cost is $10,000.

Both systems are expected to last for 20 years. Assume that the discount rate is 4% and all future costs are paid at the end of the year.

Which lighting system should the city select based on LCC considerations?

x

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Exercise 18.2

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City administration is considering refurbishing the lighting system of its administration building.

After initial investigation, the city procurement office has narrowed down the choices into the following two options:

Option 1 is a Ergolight system, which costs $500,000 to purchase and install.

Option 2 is a convention system, which costs $100,000 to purchase and install.

The system is expected to last for 20 years

The energy and maintenance cost for Option 1 is $20,000 and $2,000.

The energy and maintenance cost for Option 2 is $50,000 and $10,000.

Assume all gas costs paid at end of year.

Discount rate: 4%

Which lighting system should the city selected based on financial consideration.

Note: please use LCC analysis to facilitate the decision-making.

Parameters/Assumptions

Ergolight Conventional

Discount rate 4% 4%

Economic life (year) 20 20

Purchasing price $500,000 $100,000

Electricity costs/year $20,000 $50,000

Maintenance/year $2,000 $10,000

LCC Calculation

Costs Ergolight Conventional

Purchase $500,000 $100,000

Electricity

Maintenance

LCC

Select One (with an “x”):

Therefore, we recommend the Ergolight system.

Therefore, we recommend the Conventional system.

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Solution

City administration is considering refurbishing the lighting system of its administration building.

After initial investigation, the city procument office has narrowed down the choices into the following two options:

Option 1 is a Ergolight system, which costs $500,000 to purchase and instrall.

Option 2 is a convention system, which costs $100,000 to purchase and instrall.

The system is expected to last for 20 years

The energe and maintenance cost for Option 1 is $20,000 and $2,000.

The energe and maintenance cost for Option 1 is $50,000 and $10,000.

Assume all gas costs paid at end of year.

Discount rate: 4%

Which lighting system should the city selected based on financial consideration.

Note: please use LCC analysis to facilitate the decision-making.

Parameters/Assumptions

Urgolight Conventional

Discount rate 4% 4%

Economic life (year) 20 20

Purchansing price $500,000 $100,000

Electricity costs/year $20,000 $50,000

Maintenance/year $2,000 $10,000

LCC Calculation

Costs Urgolight Conventional

Purchase $500,000 $100,000

Electricity $271,807 $679,516

Maintenance $27,181 $135,903

LCC $798,987 $915,420

Select One (with an “x”)

Therefore, we recommend the Urgolight system.

Therefore, we recommend the Conventional system.

Grade Worksheet

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