City of Manila contemplates to increase the capacity of its existing water transmission line. Two plans are under consideration. Plan A requires the construction of a parallel pipe line, the flow being maintained by gravity. The initial cost is P2,750,000 and the life is 40 years, with an annual operating cost of P50,000. Plan B requires the construction of a booster pumping station costing P1,050,000 with a life of 40 years. The pumping equipment costs an additional amount of P250,000. It has a life of 20 years and a salvage value of P25,000. The annual operating cost is P165,000. If the interest rate is 12%, which is the more economical plan and by how much lower than the other?
City of Manila contemplates to increase the capacity of its existing water transmission line. Two plans are under consideration. Plan A requires the construction of a parallel pipe line, the flow being maintained by gravity. The initial cost is P2,750,000 and the life is 40 years, with an annual operating cost of P50,000. Plan B requires the construction of a booster pumping station costing P1,050,000 with a life of 40 years. The pumping equipment costs an additional amount of P250,000. It has a life of 20 years and a salvage value of P25,000. The annual operating cost is P165,000. If the interest rate is 12%, which is the more economical plan and by how much lower than the other?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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The City of Manila contemplates to increase the capacity of its existing water transmission line. Two plans are under consideration. Plan A requires the construction of a parallel pipe line, the flow being maintained by gravity. The initial cost is P2,750,000 and the life is 40 years, with an annual operating cost of P50,000.
Plan B requires the construction of a booster pumping station costing P1,050,000 with a life of 40 years. The pumping equipment costs an additional amount of P250,000. It has a life of 20 years and a salvage value of P25,000. The annual operating cost is P165,000.
If the interest rate is 12%, which is the more economical plan and by how much lower than the other?
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Plan B lower than Plan A by P115,906.57
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Plan B higher than Plan A by P15,906.57
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Plan A higher than Plan B by P15,906.57
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Plan A lower than Plan B by P115,906.57
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