Question

In: Economics

4. Parker county community college (PCCC) is trying to determine whether to use no insulation or...

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

Expert Solution

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

Rahul Sunny answered 1 year ago

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