A new engineer is evaluating whether to use a larger-diameter pipe for a water line. It will cost $600,000 more initially, but it will reduce pumping costs. The optimistic, most likely, and pessimistic projections for annual savings are $80,000, $50,000, and $7500, with respective probabilities of 25%, 45%, and 30%. The interest rate is 8%, and the water line should have a life of 50 years. (a) What is the PW for each estimated value? What is the expected PW? (b) Compute the expected annual savings and expected PW. (c) Do the answers for the expected PW match? Why or why not?
A new engineer is evaluating whether to use a larger-diameter pipe for a water line. It will cost $600,000 more initially, but it will reduce pumping costs. The optimistic, most likely, and pessimistic projections for annual savings are $80,000, $50,000, and $7500, with respective probabilities of 25%, 45%, and 30%. The interest rate is 8%, and the water line should have a life of 50 years. (a) What is the PW for each estimated value? What is the expected PW? (b) Compute the expected annual savings and expected PW. (c) Do the answers for the expected PW match? Why or why not?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
A new engineer is evaluating whether to use a larger-diameter pipe for a water line. It will cost $600,000 more initially, but it will reduce pumping costs. The optimistic, most likely, and pessimistic projections for annual savings are $80,000, $50,000, and $7500, with respective probabilities of 25%, 45%, and 30%. The interest rate is 8%, and the water line should have a life of 50 years. (a) What is the PW for each estimated value? What is the expected PW? (b) Compute the expected annual savings and expected PW. (c) Do the answers for the expected PW match? Why or why not?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education