A new engineer is evaluating whether to use a larger diameter pipe for a water line. The pipe will cost $327,089 more initially but will reduce pumping costs. The optimistic, most likely, and pessimistic projections for annual savings are $30,000, $20,000, and $5000, with respective probabilities of 20%, 50%, and 30%. The interest rate is most likely to be 7%, but is equally likely to be 6% or 8%, and the water line should have a life of 40 years. Find the expected annual savings and the expected interest rate. Determine the Expected PW based on these.
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A new engineer is evaluating whether to use a larger diameter pipe for a water line. The pipe will cost $327,089 more initially but will reduce pumping costs. The optimistic, most likely, and pessimistic projections for annual savings are $30,000, $20,000, and $5000, with respective probabilities of 20%, 50%, and 30%. The interest rate is most likely to be 7%, but is equally likely to be 6% or 8%, and the water line should have a life of 40 years.
Find the expected annual savings and the expected interest rate. Determine the Expected PW based on these.
Hint: Based on the different saving and their probabilities, find the expected value of savings. Then find the expected value of the interest rate (each option has equal probability). Then find the PW using these values.
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