Two alternatives are being evaluated for clean-up of groundwater beneath a landf
ID: 2636334 • Letter: T
Question
Two alternatives are being evaluated for clean-up of groundwater beneath a landfill. Alternative A consists of removing contaminants by injecting air into the groundwater and drawing the air out through a series of vacuum wells. Alternative B consists of pumping the groundwater out and treating it, and discharging it to the sewer. The projected costs for each alternative are as follows:
(In Thousands of Dollars)
YR. A B
Capital Cost 0 (140) (120)
Operations 1 60 60
savings 2 55 60
3 50 60
4 40 60
5 40 50
6 30 50
Calculate the NPV of each alternative assuming a three year and six year project life. The cost of capital is 10%.
PVIF
Year 10%
0 1.0000
1 .9091
2 .8264
3 .7513
4 .6830
5 .6209
6 .5645
Explanation / Answer
1. Calculation of NPV of project 1
NPV = Present value of cash inflow - present value of cash outflow
= (54546+45452+37565+27320+24836+16935)-140,000
= 206654-140000
=66654
1. Calculation of NPV of project 2
NPV = Present value of cash inflow - present value of cash outflow
= (54546+49584+45078+40980+31045+28225)-120,000
= 249458-120000
=129458
PARTICULARS Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Cash inflow 60,000 55,000 50,000 40,000 40,000 30,000 present value factor .9091 .8264 .7513 .6830 .6209 .5645 present value of cash inflow 54546 45452 37565 27320 24836 16935