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:

Useful lives of both alternatives are 10 years. Find the best alternative using A) simple payback period method B) discounted payback period when MARR= 0.13 per year.

Thickness	Installation cost	Annual Savings	Maintenance once in each 2 years
2 cm	$111000	$81000	$4500
5 cm	$367000	$125000	0

Answer 1

A) Option 2 cm:

Simple payback period of 2cm thickness = 1 + |-30000| / 76500 = 1 + (30000 / 76500) = 1.39 years

Simple payback period of 5cm thickness = 367,000 / 125,000 = 2.94 years

So, the best alternative is 2cm thickness.

B)

Option 2cm:

Discounted payback period of 2cm thickness = 1 + |-39315| / 59907.15 = 1 + (39315 / 59907.15) = 1.66 years

Option 5 cm:

Discounted payback period of 5cm thickness = 3 + |-71850| / 76662.50 = 1 + (71850 / 76662.50) = 3.94 years

So, the best alternative is 2cm thickness.