Question

Two insulation thickness alternatives have been proposed for a process steam line subject to severe weather conditions. One alternative must be selected. Estimated savings in heat loss and installation cost are given below:

THICKNESS	INSTALLATION COST	ANNUAL SAVINGS	MAINTENANCE ONCE IN EACH 2 YEARS
2cm	$125000	$62000	$4800
5cm	$408000	$125000	$0

d.) Useful lives of both alternatives are 8 years. Find the best alternative using Simple Payback Period Method.

IN EXCEL PLZ!!

Answer 1

Refer the attached picture for the cumulative cash flow of the two options.

From the above table we can see in case of 2cm thickness option the cumulative cash flow in year 2 is -$ 5,800 (yet to be recovered) in third year the cash inflow is $ 62,000. The payback period of the first option is

In case of second alternative the cumulative cash flow in year 3 is - $ 33,000 and the cash inflow in year 4 is $ 125,000. The payback period can be determined as follows

In case of 2 cm thickness option the amount is recovered that is Payback period is 2.05 years which is less than second case of 5 cm thickness alternative.

Select 2 cm thickness alternative.

Note: In excel there is no function for calculating the payback period. So, we have to calculate it manually.

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