An electric company must decide between two op­tions for managing the blowdown water from its cooling tower. Option 1 is to continue the lease on 50 acres of land for another 5-year period and dis­pose of the water by spray irrigation. The land­owner will move the pipe around as necessary and maintain the spray nozzles and valves. The previ­ous lease cost $125,000 per year with payments due midway through each year. Now the land­owner will require beginning of year payments of $180,000 each year. Option 2, which releases the 50 acre tract of land, involves purchasing a treatment system that will allow the recycling of most of the blowdown water. This system will have an initial cost of $1,600,000 and an AOC of $58,000 per year. How­ever, the company will save $220,000 per year

be­cause it will not have to purchase as much make-up water as with option 1. At the end of 5 years, the company will be able to sell the equipment back to the local equipment supplier for 30% of the first cost. If the electric company uses a MARR of 15% per year, should it continue to lease (defender) or purchase the treatment system (challenger)?

What will be an ideal response?


Option 1 (lease) is defender; option 2 is challenger. Find AW of lease over 5-year period

AWD = [-180,000 -180,000(P/A,15%,4)](A/P,15%,5)
= [-180,000 -180,000(2.8550)](0.29832)
= $-207,004

AWC = -1,600,000(A/P,15%,5) -58,000 + 220,000 + (0.30)(1,600,000)(A/F,15%,5)
= -1,600,000(0.29832) + 162,000 + (480,000)(0.14832)
= $-244,118

Select option 1, continue to lease the land

Trades & Technology

You might also like to view...

Where in a system is a PTC start thermistor installed?

a. In series with the start capacitor b. Parallel with the run capacitor c. Parallel with the start capacitor d. In series with the common terminal

Trades & Technology

A(n) ____ produces AC, and a(n) ____ produces DC.

A. alternator, generator B. generator, alternator C. diode, alternator D. generator, diode

Trades & Technology

Technician A says that a sliding caliper only has pistons on one side of the rotor. Technician B says that disc brakes are susceptible to brake fade. Who is correct?

A. Technician A B. Technician B C. Both D. Neither

Trades & Technology

If you try to increase your sales so that you improve your net profit you need to realize that _________

A) Increasing sales will always increase expenses B) Increasing sales will often require that you increase your expenses C) Increasing sales does not affect your expenses D) Increasing sales will reduce your expenses

Trades & Technology