An oil company installs a new pipeline to connect a storage tank to an existing pump...

An oil company installs a new pipeline to connect a storage tank to an existing pump 1,000 feet away. Three possible diameters are being considered to make the pipeline, the related costs of which are presented below:

pipeline diameter	4 inch.	6 inch.	8inch.
initial cost	$2,000	$3,000	$4,000
maintnance cost per year	600	500	400
pumping cost per hour	2.70	1.30	1.00
residual value	100	150	300
useful life	10	10	10

The company is presumed to apply a 10% interest rate on its projects. Both maintenance and the annual cost of pumping are considered as expenses that occur at the end of the year (conventional flows). For what number of pumping hours per year will the 4 and 6 inch pipelines be equally economical?

Solutions

Expert Solution

Calculating the present worth of pipeline with diameter of 4 inch (alternative A)

Now calculating the present worth of pipeline with diameter of 6 inch (alternative B)

Now equate these two present worth

When both the machines are operated for 43 hours then they will be equally economical.

Rahul Sunny answered 1 year ago

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