Question

you have asked to evaluate two pollution devices. the west scrubs cost 1000 to set up and 500 per year to operate. it must be completely replaced every 3 years, and it has no salvage value . dry scrub decice costs 2000 $ to set up and 300 per year to operate. it last for 5 years and has no salvage value . assuming pollution control equipment is replaced as ir wears out , whu h method do you recommend if wacc10 %

Answer 1

west scrubs :

Useful Life n = 03 Years

Initial Cost = 1000

Annual Cost (A) = 500

NPV = - Initial Cost - Present Value of Annual Cost

Present Value of Annual Cost

Here r = WACC = 10% = 0.1

Annual Cost (A) = 500

Present Value of Annual Cost

= 1243.43

NPV (W) = - Initial Cost - Present Value of Annual Cost

= - 1000 - 1243.43 = -2243.43

Dry Scrubs :

Useful Life  = 05 Years

Initial Cost = 2000

Annual Cost = 300

NPV  = - Initial Cost -  Present Value of Annual Cost

Present Value of Annual Cost

= 1243.43

NPV(D) = - Initial Cost - Present Value of Annual Cost

         = - 2000 - 1137.24 =   -3137.24

Since Useful life of both Machines different, we can not compare directly.

We have to use the least multiple methods for common useful life.

Least multiple of 3,5 is 15 Years

So

We will calculate NPV for 15 years of both machine.

For Wet Machine :

NPV for 05 Years

NPV (W)  = -2243.43

Here a useful life is 03 Years.

So in 15 years we have to replace it in Year 0,3,6,9, 12 th Year

NPV(W)  =    -2243.43

NPV(15) = -6861.56

For Dry Machine :

NPV(D)  = -3137.24

Useful life is 05 Years. So in 15 Years ,

We have to use it for 03 times Year 0, 05 and 10.

So

NPV = NPV(0) + NPV(5) + NPV(10)

NPV(15) = - 6294.75

Since 15 Years NPV cost for Dry machine is Less as compare to Wet Machine

We will recommend Dry Machine