A municipal power plant uses natural gas from an existing pipeline at an annual

Question

A municipal power plant uses natural gas from an existing pipeline at an annual cost of $10,000 per year. A new pipeline would initially cost $35,000, but it would reduce he annual cost to S4 000 per year. Assume an analysis period of 20 years and no salvage value for either pipeline. The interest rate is 7%. Using the equivalent uniform annual cost (EUAC) should the new pipeline be built? Hint: If the EUAC is less than the annual cost of the existing pipeline, then the new pipeline should be constructed) O a. The new pipeline should not be constructed b. The new pipeline should be constructed

Explanation / Answer

Initial cost of new pipeline = $35,000

Annual cost of new pipeline = $4,000

Time period = 20 years

Interest rate = 7%

Calculate the Equivalent Uniform Annual Cost (EUAC) of new pipeline -

EUAC = $35,000(A/P, 7%, 20) + $4,000

EUAC = ($35,000 * 0.0944) + $4,000

EUAC = $3,304 + $4,000

EUAC = $7,304

The EUAC of new pipeline is $7,304

The EUAC of new pipeline is less than the annual cost of exisiting pipeline.

So, it is beneficial and cost saving to construct the new pipeline.

Thus, the new pipeline should be constructed.

Hence, the correct answer is the option (b).

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