The K.S.A. Bureau of Reclamation is considering three proposals for increasing t

Question

The K.S.A. Bureau of Reclamation is considering three proposals for increasing the capacity of the main drainage canal in an agricultural region of Qasim. Proposal A requires dredging the canal in order to remove sediment and weeds which have accumulated during previous years' operation. The capacity of the canal will have to be maintained in the future near its design peak flow because of increased water demand. The Bureau is planning to purchase the dredging equipment and accessories for S.R.950,000. The equipment is expected to have a 10-year life with a S.R.27,000 salvage value. The annual operating costs are estimated to total S.R.70,000. To control weeds in the canal itself and along the banks, environmentally safe herbicides will be sprayed during the irrigation season. The yearly cost of the weed control program is expected to be S.R.320,000. Proposal B is to line the canal with concrete at an initial cost of S.R.6 million. The lining is assumed to be permanent, but minor maintenance will be required every year at a cost of S.R.9000. In addition, lining repairs will have to be made every 5 years at a cost of S.R.80,000. Proposal C is to construct a new pipeline along a different route. Estimates are: an initial cost of S.R.6 million, annual maintenance of S.R.6000 for right-of-way, and a life of 50 years. Compare the alternatives on the basis of annual worth, using an interest rate of 4% per year. Then state your comments.

Explanation / Answer

Cmparision of alternative on the basis of annual worth:

Comments:

If we consider only yearly costs then proposal C is better to choose because each year it costs only at $246,000 which is less compare to other two proposals.

When costs are decrease every year that means profit has increased.

If we consider total cost at thebeginning of the year only, then proposal A is better bacasue it's cost is less compare to other projects.

Since the question is asked based on annual worth, so we should consider yearly costs only. So proposal C is better to choose.

Particulars Proposal A Proposal B Proposal C Initial cost 950,000 6,000,000 6,000,000 Annual costs: Operating costs per year 70,000 Cost of weed control program per year 320,000 Minor maintenance per year 9,000 Lining repairs per year ($80,000/5 years) 16,000 Maintenance per year 6,000 Interest on initial cost at the end of each year ($950,000*4/100) ($6,000,000*4/100) ($6,000,000*4/100) 38000 240000 240000 Total yearly cost (except initial cost) 428,000 265,000 246,000 Cost at beginnig of the first year (Total yearly cost + initial cost) 1,378,000 6,265,000 6,246,000

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