Two options of feed-water storage installation are being considered to serve over 20 years of useful life: Option 1: Build a 20,000-gallon tank on a tower. The cost of installing the tank and tower is estimated to be $170,000. The annual operating and maintenance cost after tax adjustment is estimated to be $2,000. The salvage value is estimated to be negligible. Option 2: Place a 20,000-gallon tank of equal capacity on a hill near the refinery. The cost of installing the tank on the hill, including the extra length of service lines, is estimated to be $120,000 with negligible salvage value. The annual operating and maintenance cost of the water tank is estimated to be $1,500 after tax adjustment. Because of the location, an additional investment of 13,000 in pumping equipment is required. The pumping equipment is expected to have a service life of 10 years with a salvage value of $2,000 at the end of that time. The annual operating and maintenance cost (including any incometax effects) for the pumping operation is estimated at $1,000. If the firm's MARR is known to be 12%, what is the net present worth of option 1? (Use negative sign if needed) In the previous question, what is the net present worth of option 2? (Use negative sign if needed) For questions A and B, which option would you choose?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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A)Two options of feed-water storage installation are being considered to serve over 20 years
of useful life:
Option 1: Build a 20,000-gallon tank on a tower. The cost of installing the tank and tower
is estimated to be $170,000. The annual operating and maintenance cost after tax
adjustment is estimated to be $2,000. The salvage value is estimated to be negligible.
Option 2: Place a 20,000-gallon tank of equal capacity on a hill near the refinery. The cost
of installing the tank on the hill, including the extra length of service lines, is estimated to
be $120,000 with negligible salvage value. The annual operating and maintenance cost of
the water tank is estimated to be $1,500 after tax adjustment. Because of the location, an
additional investment of 13,000 in pumping equipment is required. The pumping
equipment is expected to have a service life of 10 years with a salvage value of $2,000 at
the end of that time. The annual operating and maintenance cost (including any incometax
effects) for the pumping operation is estimated at $1,000.
If the firm's MARR is known to be 12%, what is the net present worth of option 1? (Use
negative sign if needed)
B) In the previous question, what is the net present worth of option 2? (Use negative sign if
needed)
C) For questions A and B, which option would you choose?

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Present worth, also known as present value, is a financial concept that refers to the current value of a future sum of money or cash flow stream, adjusted for the time value of money. In other words, it represents the amount of money that would be required today to achieve a particular cash flow or future amount, given a certain interest rate or discount rate.

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