Question

thickness installation cost annual savings Maintenance once in each 2 years 2cm 217000 68000 4600 5cm...

thickness installation cost annual savings Maintenance once in each 2 years
2cm 217000 68000 4600
5cm 446000 125000 0

Useful lives of both alternatives are 10 years. Find the best alternative using simple payback period method

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Answer #1

Take the case when thickness is 2 cm

Year      Cash flow Cumulative cash flow
0 -217000 -217000
1 68000 -149000
2 63400 -85600
3 68000 -17600
4 63400 45800

Simple payback period in case thickness is 2 cms=3+17600/63400=3.28

Take the case when thickness is 5 cm

Simple payback period in case thickness is 5 cm=Initial cost/Annual savings

Simple payback period in case thickness is 5 cm=446000/125000=3.57 years

Simple payback is lower in case of alternative with thickness is 2 cm. So, alternative with thickness 2 cm should be selected.

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