1. Currently, two options are available for modernization of a pumping station in a water treatment facility. Option 1 is to install a pumping system which is more durable at a cost of $20,000. With this option, the system will require to be replaced every 15 years. The maintenance cost for this system runs at $4,000 every five years. Option 2 is to install a cheaper pumping system. It costs $12,000. However, the system must be replaced every 6 years. The maintenance cost for this system is $1,600 every 2 years. Compute the present worth capitalized cost for each option and decide which one would be to our advantage. The interest rate ...view middle of the document...
Using an annual interest rate of 4% and a useful life of 40 years, compute the present worth of this activity.
4. Two alternatives are suggested for improvement to a power generation plant. Alternative A costs $60,000 and provides yearly benefit of $16,000. Alternative B requires $84,000 of initial cost. However, it will yield benefits in the order of $22,000 per year.
(a) For the investment period of 3 years and an interest rate of 6%, use the net present worth method and find out which alternative is better.
(b) Repeat Part (a) but use the equivalent uniform annual cost analysis method.
(c) Repeat Part (a) and use the rate of return method and n =5 years.
(d) Considering Alternative A, take the investment period as an unknown and compute the breakeven period. Use i = 6% per year
(e) Repeat Part (d) for Alternative B.
5. Solve Problem 12 in Chapter 3 of the textbook. Hint: First compute B/C based on present worth values and eliminate those alternatives that have a B/C of less than 1. Then for the remaining alternatives, use the incremental benefit cost ratio analysis to select the best alternative.
6. Provide brief explanations for the following questions:
(a) In the incremental B/C method, if (B/(C < 1, for two alternatives, which one should be selected?
(b) Why do we rather use the incremental B/C method rather than the simple B/C method?
(d) Using the incremental rate of return, when comparing two alternatives, if i