Question
In: Economics
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 2 years agoRelated Solutions
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