Question

The town of Drygulch has been flooding once per year for the last thirty years. Folks have pretty much accepted the damages it causes. You have analyzed the flood periodicity and monetary impact to the town and know that with an upgrade to the storm drain system there would be a yearly savings depending on the flow rate (in kilogallons per minute, kgpm) of a new drainage system. The town expects a 10% MARR on any public works project. All of the drainage systems in the table below will have thirty years of useful life but the materials used can be recycled at the end of their life, remarkably giving the town back the same amount of funds that were originally needed for whatever system was chosen.

Flow Rate Options	Funds Needed, $	Yearly Savings, $
Do Nothing	0	0
50 kgpm	197,000	24,700
100 kgpm	297,000	34,700
150 kgpm	410,000	40,100
200 kgpm	497,000	54,700
250 kgpm	630,000	60,400
300 kgpm	697,000	64,700

You remember that Dr. Jones, your engineering economics professor at MSU, used Equation 6-3:

                                                       EUAC = (P-S)(A/F,i,n) + Pi

of the textbook to show that when P = S, then EUAC = Pi è i = A/P, and so any incremental would be

                                                       DEUAC = DPDi è Di = DEUAC/DP è Di = DA/DP.

Complete the table below to decide which system should be selected

Flow Rate Options	i = A/P, %	DA, $	DP, $	Di = DA/DP, %	Winner?
Do Nothing (≡ DN)
50 kgph (≡ 50)	A50/P50 =			Di of (50-DN) =
					Select =

Answer 1

The completed table is given as below:

Flow Rate Options	Funds Needed	Yearly Savings	Incremental IRR	Challenger-Defender Decision
Do Nothing	0	0		N/A
50,000	140,000	15,400	11.00%	Incremental IRR __>___ MARR, therefore____50,000____ wins
100,000	280,000	42,000	19.00%	Incremental IRR __>___ MARR, therefore____100,000____ wins
150,000	388,500	50,400	7.74%	Incremental IRR __>___ MARR, therefore____150,000___ wins
200,000	525,000	70,000	14.36%	Incremental IRR __>___ MARR, therefore____200,000____ wins
250,000	612,500	73,500	4.00%	Incremental IRR __<___ MARR, therefore ___200,000___wins
300,000	700,000	84,000	8.00%	Incremental IRR ___>__ MARR, therefore ___300,000___wins

_____

Notes:

1) The value of IRR and Incremental IRR is determined with theuse of following table:

Flow Rate Options	Yearly Savings (A)	Funds Needed (B)	IRR (A/B)	Incremental Yearly Savings (C)	Incremental Funds Needed (D)	Incremental IRR (C/D)
Do Nothing	0	0	NA	0	0	NA
50,000	15,400	140,000	11.00%	15,400 (15,400 - 0)	140,000 (140,000 - 0)	11.00%
100,000	42,000	280,000	15.00%	26,600 (42,000 - 15,400)	140,000 (280,000 - 140,000)	19.00%
150,000	50,400	388,500	12.97%	8,400 (50,400 - 42,000)	108,500 (388,500 - 288,000)	7.74%
200,000	70,000	525,000	13.33%	19,600 (70,000 - 50,400)	136,500 (525,000 - 388,500)	14.36%
250,000	73,500	612,500	12.00%	3,500 (73,500 - 70,000)	87,500 (612,500 - 525,000)	4.00%
300,000	84,000	700,000	12.00%	14,000 (84,000 - 70,000)	175,000 (700,000 - 525,000)	8.00%

2) For flow rate option 300,000, incremental yearly savings andincremental fund needed will be calculated by taking the values for200,000 flow rate option as shown in the above table.