The state is considering three proposals for increasing the capacity of the main drainage canal in an agricultural region. Proposal A requires dredging the canal. The state is planning to purchase the dredging equipment and accessories for $650,000. The equipment is expected to have a 10-year life with a $17,000 salvage value. The annual operating costs are estimated to total $50,000. To control weeds in the canal itself and along the banks, environmentally safe her- bicides will be sprayed during the irrigation season. The yearly cost of the weed control program is expected to be $120,000. Proposal B is to line the canal walls with concrete at an initial cost of $4 million. The lining is assumed to be permanent, but minor maintenance will be required every year at a cost of $5000. In addition, lining repairs will have to be made every 5 years at a cost of $30,000. Proposal C is to construct a new pipeline along a different route. Estimates are: an initial cost of $6 million, annual maintenance of $3000 for right-of-way, and a life of 50 years. Compare the alternatives on the basis of annual worth, using an interest rate of 5% per year.
The state is considering three proposals for increasing the capacity of the main drainage canal in an agricultural region. Proposal A requires dredging the canal. The state is planning to purchase the dredging equipment and accessories for $650,000. The equipment is expected to have a 10-year life with a $17,000 salvage value. The annual operating costs are estimated to total $50,000. To control weeds in the canal itself and along the banks, environmentally safe her- bicides will be sprayed during the irrigation season. The yearly cost of the weed control program is expected to be $120,000. Proposal B is to line the canal walls with concrete at an initial cost of $4 million. The lining is assumed to be permanent, but minor maintenance will be required every year at a cost of $5000. In addition, lining repairs will have to be made every 5 years at a cost of $30,000. Proposal C is to construct a new pipeline along a different route. Estimates are: an initial cost of $6 million, annual maintenance of $3000 for right-of-way, and a life of 50 years. Compare the alternatives on the basis of annual worth, using an interest rate of 5% per year.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Perform a spreadsheet-based AW evaluation of the three proposals shown. Note that the lives vary from 10 years for A, to 50 for C, to “infinite” for B.
Transcribed Image Text:The state is considering three proposals for increasing the capacity of the main
drainage canal in an agricultural region. Proposal A requires dredging the canal.
The state is planning to purchase the dredging equipment and accessories for
$650,000. The equipment is expected to have a 10-year life with a $17,000
salvage value. The annual operating costs are estimated to total $50,000. To
control weeds in the canal itself and along the banks, environmentally safe her-
bicides will be sprayed during the irrigation season. The yearly cost of the weed
control program is expected to be $120,000.
Proposal B is to line the canal walls with concrete at an initial cost of
$4 million. The lining is assumed to be permanent, but minor maintenance will
be required every year at a cost of $5000. In addition, lining repairs will have
to be made every 5 years at a cost of $30,000.
Proposal C is to construct a new pipeline along a different route. Estimates
are: an initial cost of $6 million, annual maintenance of $3000 for right-of-way,
and a life of 50 years.
Compare the alternatives on the basis of annual worth, using an interest rate
of 5% per year.
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