Question

A. The following is used for the assessment of so e (An abilityto identify, formulate, and e following is usedd for the assessment o solve engineering problems): A steam boiler is required as part of the design of a new plant. The types of fuel that can be used to ignite the boiler are natural gas, fuel oil, and coal. The cost of installation including all required controls is $40,000 for natural gas, $50,000 for fuel oil, and $120,000 for coal. In addition, the annual cost of fuel oil is $8,000 less than the annual cost of natural gas and S12,000 more than the annual cost of coal. If the boiler is to be utilized for 20 years and interest rate is 8%, determine the best alternative. Is there any other issue to consider for the obtained result?

Answer 1

R = 8%

n = 20 years

Between the fuel oil over the natural gas,

Incremental initial investment = 50000 – 40000 = $10000

Incremental annual savings = $8000

Present value of the annual savings = 8000*(1-1/1.08^20)/.08 = $78545.18

Hence, Fuel oil investment is better than the natural gas as PV of incremental saving is higher than the incremental investment.

Now between the coal and over the fuel oil,

Incremental investment = 120000 – 50000 = $70000

Incremental annual savings = $12000

Present value of the annual savings = 12000*(1-1/1.08^20)/.08 = $117817.8

Since the PV of incremental savings due to coal over fuel oil is much higher ($117817.8) than the incremental investment cost ($70000) . So, coal based project should be selected for the investment.

Though it attracts other issues as follows:

1. Coal fired system will emit higher level of pollution.
2. Pricing of these fuels of different types will change as per the international economic scenario.
3. These are the natural resources and with depletion of these resources, price will increase.