Question

4. Parker county community college (PCCC) is trying to determine whether to use no insulation or to use insulation that is either 1 inch thick or 2 inches thick on its steam pipes. the heat loss from the pipes without insulation is expected to cost $1.50 per year per foot of pipe. A 1-inch thick insulated covering will eliminate 72% of the loss and will cost $0.52 per foot. A 2-inch thick insulated covering will eliminate 93% of the loss and will cost $1.00 per foot. PCCC Physical plant services estimates that there are 214,500 feet of steam pipe on campus. The PCCC accounting office requires a 11% per year return to justify capital expenditures. The insulation has a life expectancy of 10 years.

A. Determine which insulation (if any) should be purchased using a ranking future worth analysis.

B. What is the annual worth of each option?

a. No insulation

b. 1-inch insulation

c. 2-inch insulation

Answer 1

Total annual heat loss without insulation = 214500*1.50 = 321750

Total annual heat loss with 1 inch insulation = (1-0.72)*321750 = 90090

Total annual heat loss with 2 inch insulation = (1-0.93)*321750 = 22522.50

Cost of 1 inch insulation = 0.52*214500 = 111540

Cost of 2 inch insulation = 1*214500 = 214500

Future worth without insulation = -321750*(F/A,11%,10) = -321750*16.722009 = -5380306.40

Future worth with 1 inch insulation = -111540*(F/P,11%,10) - 90090*(F/A,11%,10)

= -111540*2.839421 - 90090*16.722009

= -1823194.81

Future worth with 2 inch insulation = -214500*(F/P,11%,10) - 22522.50*(F/A,11%,10)

= -214500*2.839421 - 22522.50*16.722009

= -985677.25

As future cost of 2 inch insulation is lowest, it should be selected

Ranking on basis of FW analysis

1. 2 inch insulation

2. 1 inch insulation

3. No insulation

b.

AW of no insulation = -321750

AW of 1 inch insulation = -111540*(A/P,11%,10) - 90090

= -111540*0.169801 - 90090

= -109029.60

AW of 2 inch insulation = -214500*(F/P,11%,10) - 22522.50

= -214500*0.169801 - 22522.50

= -58944.81

As Annual cost of 2 inch insulation is lowest, it should be selected