Question

An environmental consultant is considering the installation of a water storage tank for a client. The tank is estimated to have an initial cost of $367,000, and annual maintenance costs are estimated to be $7,400 per year. As an alternative, a holding pond can be provided a short distance away at an initial cost of $218,000 for the pond plus $90,000 for pumps and piping. Annual operating and maintenance costs for the pumps and holding pond are estimated to be $16,000. The planning horizon is 20 years, and at that time, neither alternative has any salvage value. MARR is 23 %/year. What is the present worth of each alternative? Which is the preferred alternative?

Answer 1

Computation of present worth of water storage tank

Initial cost = 367,000

Annual maintenance cost = 7,400

MARR = 23%

Planning horizon = 20 years

Present Worth = 367,000 + 7,400 * PVAF (23%, 20 years)

= 367,000 + 7,400 * (4.2786)

= $398,661.76

Computation of present worth of holding pond

Initial cost = 218,000

Pumps and piping cost = 90,000

Annual maintenance cost = 16,000

MARR = 23%

Planning horizon = 20 years

Present Worth = 218,000 + 90,000 + 16,000 * PVAF (23%, 20 years)

= 308,000 + 16,000 * (4.2786)

= $376,457.85

Since, the present worth of cost is less in case of Holding pond as compared to Water storage tank, hence Holding pond should be preferred.