An electrical utility is experiencing a sharppower demand that continues to grow at a high ratein a certain local area.Two alternatives are under consideration. Each isdesigned to provide enough capacity during the next25 years, and both will consume the same amountof fuel, so fuel cost is not considered in the analysis.• Alternative A. Increase the generating capacity now so that the ultimate demand can be metwithout additional expenditures later. An investment of $25 million would be required, and itis estimated that this plant facility would be inservice for 25 years and have a salvage value of$0.85 million. The annual operating and maintenance costs (including income taxes) would be$0.4 million.• Alternative B. Spend $15 million now and follow this expenditure with future additions duringthe 10th year and the 15th year. These additionswould cost $18 million and $12 million, respectively. The facility would be sold 25 years fromnow with a salvage value of $1.5 million. Theannual operating and maintenance costs (includingincome taxes) will be $250,000 initially and willincrease to $0.35 million after the second addition (from the 11th year to the 15th year) and to$0.45 million during the final 10 years. (Assumethat these costs begin one year subsequent to theactual addition.)On the basis of the present-worth criterion, if the firmuses 15% as a MARR, which alternative should beundertaken?
An electrical utility is experiencing a sharp
power demand that continues to grow at a high rate
in a certain local area.
Two alternatives are under consideration. Each is
designed to provide enough capacity during the next
25 years, and both will consume the same amount
of fuel, so fuel cost is not considered in the analysis.
• Alternative A. Increase the generating capacity now so that the ultimate demand can be met
without additional expenditures later. An investment of $25 million would be required, and it
is estimated that this plant facility would be in
service for 25 years and have a salvage value of
$0.85 million. The annual operating and maintenance costs (including income taxes) would be
$0.4 million.
• Alternative B. Spend $15 million now and follow this expenditure with future additions during
the 10th year and the 15th year. These additions
would cost $18 million and $12 million, respectively. The facility would be sold 25 years from
now with a salvage value of $1.5 million. The
annual operating and maintenance costs (including
income taxes) will be $250,000 initially and will
increase to $0.35 million after the second addition (from the 11th year to the 15th year) and to
$0.45 million during the final 10 years. (Assume
that these costs begin one year subsequent to the
actual addition.)
On the basis of the present-worth criterion, if the firm
uses 15% as a MARR, which alternative should be
undertaken?
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