A new engineer is evaluating whether to use a larger diameter pipe for a water l

Question

A new engineer is evaluating whether to use a larger diameter pipe for a water line. It will cost $350,000 more initially, but it will reduce pumping costs. The optimistic, most likely, and pessimistic projections for annual savings are $30,000, $20,000, and $5000, with respective probabilities of 20%, 50%, and 30%. The interest rate has equal probabilities of being either 6, 7, or 8%, and the water line should have a life of 40 years. Compute the expected annual savings and the expected PW of the project.

Explanation / Answer

Total Expeced annual savings = $17,500
Expected PW of project = -$350,000 - $17,500 x PVIFA(7%,40)
Expected PW of Project = -$116,695

Annual Savings Probability Expected Annual Saving $30,000 20% $6,000 $20,000 50% $10,000 $5,000 30% $15,00

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