Question

1. A large refinery-petrochemical complex is to manufacture caustic soda, which will use feedwater of 10000 gallons per day. Two types of feedwater storage installation are being considered over the 40 years of their useful life.

Option 1: build a 20000-gallon tank on a tower. The cost of installing the tank and tower is estimated to be $164000. The salvage value is estimated to be negligible.

            Option 2: place a tank of 20000-gallon capacity on a hill, which is 150 yards away from the refinery. The cost of installing the tank on the hill, including the extra length of service lines, is estimated to be $120000 with negligible salvage value. Because of the tank’s location on the hill, an additional investment of $12000 in pumping equipment is required. The pumping equipment is expected to have a service life of 20 years with a salvage value of $1000 at the end of that time. The annual operating and maintenance cost for the pumping operation is estimated at $100. Note: If it is necessary, another pumping equipment can be bought during the project. If the firm’s MARR is known to be 9.6% which option is better on the basis of the present-worth criterion?

Answer 1

NPW of option 1 = -164000

NPW of option 2 = -120000 - 12000 - (12000 - 1000)*(P/F,9.6%,20) + 1000*(P/F,9.6%,40) - 100*(P/A,9.6%,40)

= -120000 - 12000 - (12000 - 1000)*((1 + 0.096)^-20) + 1000*((1 + 0.096)^-40) - 100*(((1 + 0.096)^40-1)/(0.096 *(1 + 0.096)^40))

= -120000 - 12000 - (12000 - 1000)*((1.096)^-20) + 1000*((1.096)^-40) - 100*(((1.096)^40-1)/(0.096 *(1.096)^40))

= -120000 - 12000 - (12000 - 1000)*0.159878 + 1000*0.025561 - 100*10.150406

= -134748.14

As Present cost of option 2 is less, it should be selected