6-23. Environmentally conscious companies looking for ways to be less damaging t

Question

6-23. Environmentally conscious companies looking for ways to be less damaging to the environment while saving money with innovative in- vestments in capital equipment. DuPont is sponsoring a project to recover much of the energy presently being lost in the primary stage of one of their chemical reactor vessels. Three mutually exclusive designs are being considered for implementation. The estimated capital requirements and annual savings in operating expenses are given below. Assume a MARR 15% per year, and the study period is 6 years. Salvage values of the three designs are negligible. Which design should be selected? (6.4) EOY ER1 ER2 ER3 0 $110,000 $115,000 $81,200 1-6 $25,800 in year 1, growing at 6% per year $29,000 $19,7 in year 1, growing by $250 per year per year

Explanation / Answer

To select the best investment option, let us use NPV and IRR functions in excel.

NPV = (0.15, Cashflow from year 1 to 6) + Initial Investment

IRR = (Cashflow from year 0 to year 6)

Looking at the NPV and IRR, option ER1 is the best design to be selected as its NPV is positive and IRR is 15%.

Year ER1 ER2 ER3 0 -110000 -115000 -81200 1 25800 29000 19750 2 27348 29250 19750 3 28989 29500 19750 4 30728 29750 19750 5 32572 30000 19750 6 34526 30250 19750 NPV 864.05 -3265.81 -6456.47 IRR 15% 14% 12%

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