Question

Two mutually exclusive alternatives are being considered for the environmental protection equipment at a petroleum refinery. One of these alternatives must be selected. a. Which environmental protection equipment alternative should be​ selected? The​ firm's MARR is ​20% per year. Assume the equipment will be needed indefinitely. Assume repeatability is appropriate for this comparison. b. Assume the study period is shortened to five years. The market value of Alternative B after five years is estimated to be ​$16000. Which alternative would you​ recommend? Assume repeatability is appropriate for this comparison.

Answer 1

Since no data is given, I'll use a sample data as shown:

	Alternative A	Alternative B
Capital Investment	$25,000	$40,000
Annual Expenses	5500	4000
Market value at end of useful life	1100	4200
Useful Life	5 years	10 years

The above table will be the data, I'll be using. And Compound interest table for 20% will be used.
a.

As MARR IS 20% ans service life is indefinitely

AW(A) = -$25,000(A/P, 20%,5) -5500 +1100(A/F, 20%,5)

= -25,000x0.3344 -5500 +1100x0.1344

=-$13,712.16

AW(B) = -$40,000(A/P, 20%,10) -4000 +4200(A/F, 20%,10)

= -40,000x0.2385 -4000 +4200x0.0385

=-$13,378.3

Alternative B has higher value than A, so Alternative B is better.

b.

Assuming the study period as 5 years for both and the salvage value give is $16,000

Therefore, AW(B) =

-$40,000(A/P, 20%,5) -4000 +16000(A/F, 20%,5)

= -40,000x0.3344 -4000 +16000x0.1344

=-$15,225.6

Since annual worth of A is greater tha B, Alternative A is better.

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