An electric company must decide between two options for managing the blowdown water from its cooling tower. Option 1 is to continue the lease on 50 acres of land for another 5-year period and dispose of the water by spray irrigation. The landowner will move the pipe around as necessary and maintain the spray nozzles and valves. The previous lease cost $125,000 per year with payments due midway through each year. Now the landowner will require beginning of year payments of $180,000 each year. Option 2, which releases the 50 acre tract of land, involves purchasing a treatment system that will allow the recycling of most of the blowdown water. This system will have an initial cost of $1,600,000 and an AOC of $58,000 per year. However, the company will save $220,000 per year because it will not have to purchase as much make-up water as with option 1. At the end of 5 years, the company will be able to sell the equipment back to the local equipment supplier for 30% of the first cost. If the electric company uses a MARR of 15% per year, should it continue to lease (defender) or purchase the treatment system (challenger)?
An electric company must decide between two options
for managing the blowdown water from its
cooling tower. Option 1 is to continue the lease on
50 acres of land for another 5-year period and dispose
of the water by spray irrigation. The landowner
will move the pipe around as necessary and
maintain the spray nozzles and valves. The previous
lease cost $125,000 per year with payments
due midway through each year. Now the landowner
will require beginning of year payments of
$180,000 each year.
Option 2, which releases the 50 acre tract of
land, involves purchasing a treatment system that
will allow the recycling of most of the blowdown
water. This system will have an initial cost of
$1,600,000 and an AOC of $58,000 per year. However,
the company will save $220,000 per year because
it will not have to purchase as much make-up
water as with option 1. At the end of 5 years, the
company will be able to sell the equipment back to
the local equipment supplier for 30% of the first
cost.
If the electric company uses a MARR of 15%
per year, should it continue to lease (defender) or
purchase the treatment system (challenger)?
Step by step
Solved in 3 steps with 4 images
