A production facility is currently utilizing carbon steel tubing. The current process will require the injection of chemicals to control tubing corrosion due to high temperatures, pressures, and corrosive chlorides in the transported product. It is proposed to replace the car- bon steel that cost $12 per foot with an installation cost of $125,000 last year, with a chrome stainless steel tubing that would cost $68 per foot today (time zero). 20,000 feet of tubing would be required and installation costs are estimated to total $500,000 (also at time zero). Annual cost savings in chemicals, labor, and chemical injection equip- ment are projected to be $550,000 in year one. The year one savings would escalate at an annually compounded rate of 7% per year beginning in year 2. For simplicity, use a 6-year evaluation life with a salvage value of zero at the end of year 6. Assume a 15% minimum ROR. Identify the two mutually exclusive service alternatives in time diagram format and evaluate each with a present worth cost analysis. Support your cost findings using incremental NPV and ROR analyses to determine if the installation of the chrome tubing is economically desirable. Assume the existing carbon steel tubing has no salvage value
A production facility is currently utilizing carbon steel tubing. The current process will require the injection of chemicals to control tubing corrosion due to high temperatures, pressures, and corrosive chlorides in the transported product. It is proposed to replace the car- bon steel that cost $12 per foot with an installation cost of $125,000 last year, with a chrome stainless steel tubing that would cost $68 per foot today (time zero). 20,000 feet of tubing would be required and installation costs are estimated to total $500,000 (also at time zero). Annual cost savings in chemicals, labor, and chemical injection equip- ment are projected to be $550,000 in year one. The year one savings would escalate at an annually compounded rate of 7% per year beginning in year 2. For simplicity, use a 6-year evaluation life with a salvage value of zero at the end of year 6. Assume a 15% minimum ROR. Identify the two mutually exclusive service alternatives in time diagram format and evaluate each with a present worth cost analysis. Support your cost findings using incremental NPV and ROR analyses to determine if the installation of the chrome tubing is economically desirable. Assume the existing carbon steel tubing has no salvage value
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Hint: You need to do the following three things;
1) PWC Old & PWC New
2) Incremental NPV
3) Incremental ROR
Transcribed Image Text:A production facility is currently utilizing carbon steel tubing. The
current process will require the injection of chemicals to control
tubing corrosion due to high temperatures, pressures, and corrosive
chlorides in the transported product. It is proposed to replace the car-
bon steel that cost $12 per foot with an installation cost of $125,000
last year, with a chrome stainless steel tubing that would cost $68 per
foot today (time zero). 20,000 feet of tubing would be required and
installation costs are estimated to total $500,000 (also at time zero).
Annual cost savings in chemicals, labor, and chemical injection equip-
ment are projected to be $550,000 in year one. The year one savings
would escalate at an annually compounded rate of 7% per year
beginning in year 2. For simplicity, use a 6-year evaluation life with a
salvage value of zero at the end of year 6. Assume a 15% minimum
ROR. Identify the two mutually exclusive service alternatives in time
diagram format and evaluate each with a present worth cost analysis.
Support your cost findings using incremental NPV and ROR analyses
to determine if the installation of the chrome tubing is economically
desirable. Assume the existing carbon steel tubing has no salvage value
today
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