The following three mutually exclusive alternative proposals are being considered for flood proofing a factory building that is located in an area subject to occasional flooding by a nearby river. 1. Do nothing: Damage to the building in a moderate flood is $9,000 and in a severe flood it is $23,000. 2. Protect the building with a one-time initial expenditure of $20,000 so that the building can withstand moderate flooding without any damage and withstand severe flooding with only a $12,000 damage. 3. Protect the building with a one-time initial expenditure of $31,000 so that the building can withstand any flooding with no damage at all. In any year, there is a 19% probability of moderate flooding and a 9% probability of severe flooding. Using a MARR of 6% per year and a service life of 20 years, determine which of the three alternatives is the most economical. (a) Calculate EUAC values for each scenario (use negative numbers for costs) The expected EUAC for the "Do Nothing" alternative is $ (Round to the nearest whole number.) The expected EUAC for Alternative 2 is $ (Round to the nearest whole number.) The EUAC for Alternative 3 is $ (Round to the nearest whole number.) (b) The most economical alternative is OA. Alternative 2 OB. Do nothing C. Alternative 3
The following three mutually exclusive alternative proposals are being considered for flood proofing a factory building that is located in an area subject to occasional flooding by a nearby river. 1. Do nothing: Damage to the building in a moderate flood is $9,000 and in a severe flood it is $23,000. 2. Protect the building with a one-time initial expenditure of $20,000 so that the building can withstand moderate flooding without any damage and withstand severe flooding with only a $12,000 damage. 3. Protect the building with a one-time initial expenditure of $31,000 so that the building can withstand any flooding with no damage at all. In any year, there is a 19% probability of moderate flooding and a 9% probability of severe flooding. Using a MARR of 6% per year and a service life of 20 years, determine which of the three alternatives is the most economical. (a) Calculate EUAC values for each scenario (use negative numbers for costs) The expected EUAC for the "Do Nothing" alternative is $ (Round to the nearest whole number.) The expected EUAC for Alternative 2 is $ (Round to the nearest whole number.) The EUAC for Alternative 3 is $ (Round to the nearest whole number.) (b) The most economical alternative is OA. Alternative 2 OB. Do nothing C. Alternative 3
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The following three mutually exclusive alternative proposals are being considered for flood proofing a factory building that is located
in an area subject to occasional flooding by a nearby river.
1. Do nothing: Damage to the building in a moderate flood is $9,000 and in a severe flood it is $23,000.
2. Protect the building with a one-time initial expenditure of $20,000 so that the building can withstand moderate flooding without
any damage and withstand severe flooding with only a $12,000 damage.
3. Protect the building with a one-time initial expenditure of $31,000 so that the building can withstand any flooding with no damage
at all.
In any year, there is a 19% probability of moderate flooding and a 9% probability of severe flooding. Using a MARR of 6% per year
and a service life of 20 years, determine which of the three alternatives is the most economical.
(a) Calculate EUAC values for each scenario (use negative numbers for costs)
The expected EUAC for the "Do Nothing" alternative is $
(Round to the nearest whole number.)
The expected EUAC for Alternative 2 is $ (Round to the nearest whole number.)
The EUAC for Alternative 3 is $ (Round to the nearest whole number.)
(b) The most economical alternative is
A. Alternative 2
B. Do nothing
C. Alternative 3
Expert Solution
Step 1: Equivalent annual cost
Equivalent Annual Cost (EAC) is the yearly cost of owning, operating, and maintaining an asset over its whole life. Firms often use EAC for capital budgeting decisions, as it permits a company to compare the cost-effectiveness of different assets with unequal lifespans.
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