5. EP Electric has identified two new methods to treat its cooling water. Altern

Question

5. EP Electric has identified two new methods to treat its cooling water. Alternative I (for inflow) would treat the raw water with a conventional reverse osmosis system so that the cycles of concentration could be increased from 5 to 20 This will result in water cost savings of $360,000 per year and chemical cost savings of $56,000 per year. The initial cost of the equipment will be $2.3 million with an operating cost of $125,000 per year Alternative B (for blowdown) will treat the cooling tower blowdown water using a highpressure seawater reverse osmosis system to recover most of the water that is sent to an evaporation pond. This option will result in water sav- ings of $270,000 per year. The cost of the system will be $1.2 million with an operating cost of $105,000 per year. Assuming one of the two methods must be installed, determine which is preferred on the basis of the incremental ROR value using MARR of 5% per year, which is a typically low return expected of government projects. Use a 10-year study period with no salvage value for either system. (Note: See Problem 8.41 for more on this situation.)

Explanation / Answer

Incremental Rate of return is used to study the investments which involve two competing investment opportunities of different amounts of investment. Here the difference between the highest capital investment is subtracted with lower investment. Since the incremental IRR (0.9%) is less than 5% MARR and NPV is positive for alternative B, the alternative B is selected over the alternative I.

Year Alternative I Savings Net cash flow Alternative B Savings Net cash flow Incremental IRR 0 -2300000 -2300000 -2300000 -1200000 -1200000 -1100000 -1200000 1 -125000 416000 291000 -105000 270000 165000 126000 2 -125000 416000 291000 -105000 270000 165000 126000 3 -125000 416000 291000 -105000 270000 165000 126000 4 -125000 416000 291000 -105000 270000 165000 126000 5 -125000 416000 291000 -105000 270000 165000 126000 6 -125000 416000 291000 -105000 270000 165000 126000 7 -125000 416000 291000 -105000 270000 165000 126000 8 -125000 416000 291000 -105000 270000 165000 126000 9 -125000 416000 291000 -105000 270000 165000 126000 10 -125000 416000 291000 -105000 270000 165000 126000 IRR 0.90% NPV -52975.14 174086.26

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