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 $33 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 $0.7 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 $1.25 million. The annual operating and maintenance costs (including income taxes) will be $450,000 initially and will increase to $0.55 million after the second addition (from the 11th year to the 15th year) and to $0.65 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 13% as a MARR, which alternative should be undertaken? Note: Adopt incremental cost approach.
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 $33 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 $0.7 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 $1.25 million. The annual operating and maintenance costs (including income taxes) will be $450,000 initially and will increase to $0.55 million after the second addition (from the 11th year to the 15th year) and to $0.65 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 13% as a MARR, which alternative should be undertaken? Note: Adopt incremental cost approach.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text: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 $33 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 $0.7 million. The annual operating and maintenance costs (including income taxes) would be $0.4 million.
salvage
• 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
value of $1.25 million. The annual operating and maintenance costs (including income taxes) will be $450,000 initially and will increase to $0.55 million after the second addition (from the 11th year to the 15th year) and to $0.65 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 13% as a MARR, which alternative should be undertaken?
Note: Adopt incremental cost approach.
Equal Payment Series
Single Payment
Compound
Amount
Sinking Present
Capital
Recovery
Fund
Worth
Compound
Amount
Factor
(F/A, i, N)
Factor
Factor
(F/P, i, N)
(A/F, i, N)
Factor
(P/A, i, N)
Factor
(A/P, i, N)
1.1300
1.0000
1.0000
0.8850
1.1300
1.2769
2.1300
0.4695
1.6681
0.5995
1.4429
3.4069
0.2935
2.3612
0.4235
1.6305
4.8498
0.2062
2.9745
0.3362
1.8424
6.4803
0.1543
3.5172
0.2843
2.0820
8.3227
0.1202
3.9975
0.2502
2.3526
10.4047
0.0961
4.4226
0.2261
2.6584
12.7573
0.0784
4.7988
0.2084
3.0040
15.4157
0.0649
5.1317
0.1949
3.3946
18.4197
0.0543
5.4262
0.1843
3.8359
21.8143
0.0458
5.6869
0.1758
4.3345
25.6502
0.0390
5.9176
0.1690
4.8980
29.9847
0.0334
6.1218
0.1634
5.5348
34.8827
0.0287
6.3025
0.1587
6.2543
40.4175
0.0247
6.4624
0.1547
7.0673
46.6717
0.0214
6.6039
0.1514
7.9861
53.7391
0.0186
6.7291
0.1486
9.0243
61.7251
0.0162
6.8399
0.1462
10.1974
70.7494
0.0141
6.9380
0.1441
11.5231
80.9468
0.0124
7.0248
0.1424
13.0211
92.4699
0.0108
7.1016
0.1408
14.7138
105.4910
0.0095
7.1695
0.1395
16.6266
120.2048
0.0083
7.2297
0.1383
18.7881
136.8315
0.0073
7.2829
0.1373
21.2305
155.6196
0.0064
7.3300
0.1364
N
1
2
3
3
4
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Present
Worth
Factor
(P/F, i, N)
0.8850
0.7831
0.6931
0.6133
0.5428
0.4803
0.4251
0.3782
0.3329
0.2946
0.2607
0.2307
0.2042
0.1807
0.1599
0.1415
0.1252
0.1108
0.0981
0.0868
0.0768
0.0680
0.0601
0.0532
0.0471
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