An oil cmpany must install antipollution equipment in a new refinery to meet fed
ID: 2613883 • Letter: A
Question
An oil cmpany must install antipollution equipment in a new refinery to meet federal clean-air standards. Four design alternatives are being considered, which will have capital investment and annual operating expenses as shown in the table. Assume a useful life of 9 years for each design, no market value, a desired MARR of 12% per year and an analysis period of 9 years which one (if any) should be selected? Solve this problem using the ERR method Lete: 10% per year E Click the icon to view the alternatives description Click the icon to view the interest and annuity table for discrete compounding when Which alternative would you choose as a base one? Choose the correct answer below OA. D3 10% per year O B. 01 Analyze the difference between the base alternative and the second-choice altenative vi):[ ]% (Round to one decimal place ) ERR A(I ERR A% Round to one decimal place) ERR (l' '])-[)%(Round to one decimal place ) , Analyze the difference between the current base altermative and the third-choice alternative Analyze the difference between the current base alternative and the fourth-choice alternative Which alternative should be selected? Choose the correct answer below B. Di O D. D2 E. None of the aboveExplanation / Answer
Alternative with least capital investment Will be the base alternative. Answer:C. D1 Second Choice=D2(next higher capital investment) Difference between between D1 and D2 A B C=A-B D1 D2 Difference in cash flow Capital investyment $600,000 $750,000 ($150,000) Annual expenses: Power $70,000 $68,000 $2,000 Labor $40,000 $45,000 ($5,000) Maintenance $670,000 $590,000 $80,000 Taxes and insurance $13,000 $15,000 ($2,000) Total annual expenses $793,000 $718,000 $75,000 Differential cash flow in year0 ($150,000) Differential cash flow in year1 to 9 years $75,000 Future Value Factor (Compound Amount Factor(N=9, 10%) 13.5795 Future value of cash flows from year1 to 9 at 10% return $1,018,463 (75000*13.5795) External Rate of Return =ERR Delta 1=R1 150000*(1+R1)^9=1018463 (1+R1)=(1018463/150000)^(1/9)= 1.237166633 R1=1.237166633-1= 0.237166633 External Rate of Return =ERR Delta 1=R1 23.72% Third Choice=D3 Difference between between D1 and D3 A B C=A-B D1 D3 Difference in cash flow Capital investyment $600,000 $1,230,000 ($630,000) Annual expenses: Power $70,000 $120,000 ($50,000) Labor $40,000 $70,000 ($30,000) Maintenance $670,000 $420,000 $250,000 Taxes and insurance $13,000 $22,000 ($9,000) Total $793,000 $632,000 $161,000 Differential cash flow in year0 ($630,000) Differential cash flow in year1 to 9 years $161,000 Future Value Factor (Compound Amount Factor(N=9, 10%) 13.5795 Future value of cash flows from year1 to 9 at 10% return $2,186,300 (13.5795*161000) External Rate of Return =ERR Delta 1=R2 630000*(1+R2)^9=2186300 (1+R2)=(2186300/630000)^(1/9)= 1.14826205 R2=1.14826205-1= 0.14826205 External Rate of Return =ERR Delta 1=R2 14.83% Fourth Choice=D4 Difference between between D1 and D4 A B C=A-B D1 D4 Difference in cash flow Capital investyment $600,000 $1,650,000 ($1,050,000) Annual expenses: Power $70,000 $130,000 ($60,000) Labor $40,000 $55,000 ($15,000) Maintenance $670,000 $370,000 $300,000 Taxes and insurance $13,000 $28,000 ($15,000) Total $793,000 $583,000 $210,000 Differential cash flow in year0 ($1,050,000) Differential cash flow in year1 to 9 years $210,000 Future Value Factor (Compound Amount Factor(N=9, 10%) 13.5795 Future value of cash flows from year1 to 9 at 10% return $2,851,695 (13.5795*210000) External Rate of Return =ERR Delta 1=R3 1050000*(1+R3)^9=2851695 (1+R3)=(2851695/1050000)^(1/9)= 1.117410226 R3=1.117410226-1= 0.117410226 External Rate of Return =ERR Delta 1=R3 11.74% Differential ERR is highest for D1 and D2(23.72%) The differential ERR of 23.72% is higher than MARR of 12% Hence, D2 should be selected Answer: A. D2