Question

An engineer working for a company with a chemical plant is considering two different liners for an evaporation pond that will receive waste water from the plant. He found two options and want to make use of a Present Worth comparison analysis to decide which alternative will be the more cost effective solution. The interest rate to be used in the comparison is 8% per year.

The evaporation pond has an area of 532,400 square-meter that need to be covered and a plastic liner that he could identify, costs R125 per square-meter (installed). The life-time of the plastic liner is 15 years and at that time precipitated solids will have to be removed at a cost of R5million before it can be replaced – this cost DO NOT need to be repeated at the end of the LCM. As alternative he identified a rubberized elastomeric liner that is tougher and has an expected life of 30 years but the initial cost to install this liner will be R198 per square-meter.

Calculate the Present Worth of the cost of the plastic liner over the LCM period - Select the correct answer from the table below (rounded):

Answer 1

Calculation of Present worth of Cost:-

(a). Cost to be incurred at begining for plastic liner = 66,550,000 (532,400 X 125)

Precipitated removal cost at the end of 15 years = 5,000,000

Replacement cost of plastic liner at the end of 15 years = 66,550,000

Present value = (66,550,000 X 1 ) + ( 5,000,000 X 0.32 ) + ( 66,550,000 X 0.32)

= 66,550,000 + 1,600,000 + 21,296,000

= 89,446,000

(b) Alternate -rubberized elastomeric liner

Cost to be incurred at begining = 105,415,200 (532,400 X 198)

Present value = 105,415,200

Hence , Rubberized elastomeric liner has present worth cost of 15,969,200 more than plastic liner.