Problem 3 (25 points A power plant operator is considering an investment in incr

Question

Problem 3 (25 points A power plant operator is considering an investment in increased efficiency of their plant that costs $1.2 million and lasts for 10 years, during which time it will save $250,000/ year. The investment has no salvage value. The plant has an MARR of 13%. Is the investment viable? Problem 4(25 points An oil company refines crude oil valued at $62/barrel and sells it to motorists at its retail outlets. The price is $2.90/U.S. gallon (S0.77/L). On a per unit basis (e.g, per gallon or per liter), by what percentage has the price increased going from crude oil before refining to final sale to the motorist?

Explanation / Answer

Problem 3

Present Investment = $ 1,200,000

Savings each year = $ 250,000

Calculate PV of all the savings(assuming savings happen at the end of each year) = PV(13%,10,-250,000) = $1,356,561 So, PV of all cash flows = 1,356,561 - $1,200,000 = $156,561

Hence, investment should be made in increasing the efficiency.

Problem 4

96.45%

Percentage Increase = (2.9- 1.48)/1.48 = 96.45%

1 barrel = 42 Gallons

Crude Oil ($ per barrel) 62 Crude Oil ($ per gallons) 1.48 Retail outlet price ($ per gallons) 2.9 Percentage Increase

96.45%

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