Q2: The designer of the penstock for a small hydroelectric cogeneration station has the optionof using steel pipe, which costs $150,000 installed and requires $4000 yearly for painting andleak-checking maintenance, or DSR4.3 (heavy-duty plastic) pipe, which costs $170,000installed and requires $1150 yearly for leak-checking maintenance. Both options have anexpected life of 30 years. If the interest rate is 8%, which choice has the lower presentequivalent cost, and how much lower is it?

Answered: expected life of 30 years. If the…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Q2: The designer of the penstock for a small hydroelectric cogeneration station has the option
of using steel pipe, which costs $150,000 installed and requires $4000 yearly for painting and
leak-checking maintenance, or DSR4.3 (heavy-duty plastic) pipe, which costs $170,000
installed and requires $1150 yearly for leak-checking maintenance. Both options have an
expected life of 30 years. If the interest rate is 8%, which choice has the lower present
equivalent cost, and how much lower is it?

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Present equivalent cost is the annual cost of acquiring and maintaining an asset determined by dividing the net present value of the asset purchase and maintenance cost by the present value of annuity factor.

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