In: Economics
the city engineer asks you to compare the cost of installing water pipe with city employees ( alternative A) versus contracting it out ( Alternative B). They need to lay 4000 lineal feet of pipe per month for 48 months. Use i=9% per year
Alternative A:
Buy equipment =$2,000,000 paid now
Resale of equipment at EMO 48 = 10% of purchase price
Equipment O & M, labor, Materials = $10/lineal foot for the first 12 months, increasing by $0.10/month for each
subsequent month
Alternative B
Contract the work for $25/lineal foot with no increases over the 48-month period.
find the Net Present Cost for each alternative and compare.
only EXCEL answer
Data Provided in the question:
Two alternative plans are provided for installing water pipes with the following details:
Alternative A:
Alternative B:
Additional details:
Solution:
To find Net Present cost, total cash outflow of the project is calculated and total cash inflow discounted by the interest rate is subtracted from it.
Total Cash outflow is the sum of Equipment, Labour & Materials and Contract fee.
Contract fee is total lineal feet of pipe laid multiplied with $25 per feet.
4000 feet per month X 48 months =192000 feet
Labour & Materials are calculated as under:
Residual Value of Materials is calculated by discounting the resale value of materials by the interest rate over the given time period,
Residual value= Resale Value/ (1+rate of interest)^No. of years
By substituting values we get,
Residual value= 10% of Purchase price/ (1+0.09)^4 years
Residual value= $ 200,000/ 1.41158
Residual value=$ 141,685.04
By the above comparison, we find that the Net Present cost of Contracting the work is more that executing the work with city employees.