. Two options of feed-water storage installation are being considered to serve over 20 years of useful life: Option 1: Build a 20,000-gallon tank on tower. The cost of installing the tank and tower is estimated to be $170,000. The annual operating and maintenance cost after tax adjustment is estimated to be $2,000. The salvage value is estimated to be negligible. Option 2: Place a 20,000-gallon tank of equal capacity on a hill near the refinery. The cost of installing the tank on the hill, including the extra length of service lines, is estimated to be $120,000 with negligible salvage value. The annual operating and maintenance cost of the water tank is estimated to be $1,500 after tax adjustment. Because of the location, an additional investment of 13,000 in pumping equipment is required. The pumping equipment is expected to have a service life of 10 years with a salvage value of $2,000 at the end of that time. The annual operating and maintenance cost (including any incometax effects) for the pumping operation is estimated at $1,000. If the firm's MARR is known to be 12%, what is the net present worth of option 1? (Use negative sign if needed) . In the previous question, what is the net present worth of option 2? (Use negative sign if needed)
. Two options of feed-water storage installation are being considered to serve over 20 years of useful life: Option 1: Build a 20,000-gallon tank on tower. The cost of installing the tank and tower is estimated to be $170,000. The annual operating and maintenance cost after tax adjustment is estimated to be $2,000. The salvage value is estimated to be negligible. Option 2: Place a 20,000-gallon tank of equal capacity on a hill near the refinery. The cost of installing the tank on the hill, including the extra length of service lines, is estimated to be $120,000 with negligible salvage value. The annual operating and maintenance cost of the water tank is estimated to be $1,500 after tax adjustment. Because of the location, an additional investment of 13,000 in pumping equipment is required. The pumping equipment is expected to have a service life of 10 years with a salvage value of $2,000 at the end of that time. The annual operating and maintenance cost (including any incometax effects) for the pumping operation is estimated at $1,000. If the firm's MARR is known to be 12%, what is the net present worth of option 1? (Use negative sign if needed) . In the previous question, what is the net present worth of option 2? (Use negative sign if needed)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Two options of feed-water storage installation are being considered to serve over 20 years
of useful life:
Option 1: Build a 20,000-gallon tank on tower. The cost of installing the tank and tower
is estimated to be $170,000. The annual operating and maintenance cost after tax
adjustment is estimated to be $2,000. The salvage value is estimated to be negligible.
Option 2: Place a 20,000-gallon tank of equal capacity on a hill near the refinery. The cost
of installing the tank on the hill, including the extra length of service lines, is estimated to
be $120,000 with negligible salvage value. The annual operating and maintenance cost of
the water tank is estimated to be $1,500 after tax adjustment. Because of the location, an
additional investment of 13,000 in pumping equipment is required. The pumping
equipment is expected to have a service life of 10 years with a salvage value of $2,000 at
the end of that time. The annual operating and maintenance cost (including any incometax
effects) for the pumping operation is estimated at $1,000.
If the firm's MARR is known to be 12%, what is the net present worth of option 1? (Use
negative sign if needed)
. In the previous question, what is the net present worth of option 2? (Use negative sign if
needed)
.
For questions 15 and 16, which option would you choose?
Expert Solution
Step 1
Present worth
In this process of comparison, the cash flows of each option will be reduced to time 0 by assuming a rate of interest i. In most practical decision environments, executives will be forced to select the best option from a set of calculating options.
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