Two alternatives are being evaluated for clean-up of groundwater beneath a landf

Question

Two alternatives are being evaluated for clean-up of groundwater beneath a landfill. Alternative A consists of removing contaminants by injecting air into the groundwater and drawing the air out through a series of vacuum wells. Alternative B consists of pumping the groundwater out and treating it, and discharging it to the sewer. The projected costs for each alternative are as follows:

(In Thousands of Dollars)

                 

                     YR.     A         B

                  

                   Capital Cost 0       (140)     (120)

                   Operations    1        60       60

                   savings       2        55        60

                                3        50        60

                                4        40        60

                                5        40        50

                                6        30        50

    

Calculate the NPV of each alternative assuming a three year and six year project life. The cost of capital is 10%.

PVIF

Year          10%   

0       1.0000

          1       .9091

2       .8264

3       .7513

4       .6830

5       .6209

6       .5645

Explanation / Answer

1. Calculation of NPV of project 1

NPV = Present value of cash inflow - present value of cash outflow

= (54546+45452+37565+27320+24836+16935)-140,000

= 206654-140000

=66654

1. Calculation of NPV of project 2

NPV = Present value of cash inflow - present value of cash outflow

= (54546+49584+45078+40980+31045+28225)-120,000

= 249458-120000

=129458

PARTICULARS Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Cash inflow 60,000 55,000 50,000 40,000 40,000 30,000 present value factor .9091 .8264 .7513 .6830 .6209 .5645 present value of cash inflow 54546 45452 37565 27320 24836 16935

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