The Consolidated Oil Company must install antipollution equipment in a new refin
ID: 1168756 • Letter: T
Question
The Consolidated Oil Company must
install antipollution equipment in a new refinery
to meet federal clean-air standards. Four design
alternatives are being considered, which will have
capital investment and annual operating expenses as
shown below. Assuming a useful life of 8 years for each
design, no market value, a desired MARR of 10% per
year, determine which design should be selected on the
basis of the PW method. Confirm your selection by
using the FW and AW methods. Which rule (Section
6.2.2) applies? Why?
Design Capital Investment Annual Expenses
D1 $600,000 $780,000
D2 760,000 728,000
D3 1,240,000 630,000
D4 1,600,000 574,000
Sullivan, William G.; Wicks, Elin M.; Koelling, C. Patrick (2014-01-06). Engineering Economy (16th Edition) (Page 292). Prentice Hall. Kindle Edition.
Sullivan, William G.; Wicks, Elin M.; Koelling, C. Patrick (2014-01-06). Engineering Economy (16th Edition) (Page 292). Prentice Hall. Kindle Edition.
Explanation / Answer
We have the following formula of PW of a project:
PW = PV of cash inflows – PV of cash outflows
All the cash inflows are in the form of annuity, therefore, we can use PV of annuity factor to discount the cash inflows:
MARR = 10%
N = 8
PV of annuity factor for marr =10% and n =8 years will be 5.3349
PW of D1
PW = -780,000 x5.3349 – 600,000
=-4,761,222
PW of D2
PW = -728,000 x5.3349 – 760,000
=-4,643,807.20
PW of D3
PW = -630,000 x5.3349 – 1,240,000
=-4,600,987
PW of D4
PW = -574,000 x5.3349 – 1,600,000
=-4,662,232.60
Since PW of cost of Design D3 is the lowest, we will select Design D3.
Rule applied: for the costs, the minimum it is the better it is if everything else remain constant. Therefore, we will select the design with the lowest of amount of Present worth of cost.
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