3. consideration is being given to two plans for supplying water to a plant. Pla

Question

3. consideration is being given to two plans for supplying water to a plant. Plan A requires a pipeline costing $160,000 with annual operation and upkeep costs of $2200, and an estimated life of 30years with no salvge. Plan B requires a flume costing $34000 with a life of 10 years, a salvage value of $5600, and annual operation and upkeep of $4500 plus a ditch costing $58000, with a life of 30 yers and annual costs for upkeep of $2500. Using an interest rate of 12 percent, compare the net present values of the two alternatives.

Explanation / Answer

The NPV for the Flume option seems to be less costly than the pipeline.

Pipeline Year Pipeline PV factor @12% PV Initial Cost 0 -160000 1 -160000 Annual upkeep cost 1 to 30 -2200 8.0552 -17721.44 NPV -177721.44

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