Parker County Community College (PCCC) is trying to determine whether to use no
ID: 2730337 • Letter: P
Question
Parker County Community College (PCCC) is trying to determine whether to use no insulation or to use insulation that is either 1 inch thick or 2 inches thick on its steam pipes. The heat loss from the pipes without insulation is expected to cost $1.80 per year per foot of pipe. A 1-inch thick insulated covering will eliminate 89 % of the loss and will cost $0.40 per foot. A 2-inch thick insulated covering will eliminate 92 % of the loss and will cost $0.70 per foot. PCCC Physical Plant Services estimates that there are 280,000 feet of steam pipe on campus. The PCCC Accounting Office requires a 11.5 %/year return to justify capital expenditures. The insulation has a life expectancy of 10 years. What is the present worth of each option?
No insulation: $
1-inch insulation: $
Explanation / Answer
1-inch thick insulation:-
Capital cost = 280000 * 0.40 = $ 112000
Benefit from 1-inck thich insulation every year = (89 % of 1.80) * 280000 = $ 448560
Present value of benefit = 448560 * Cumulative P.V. factor for 10 Years $ 11.50 %
= 448560 * 5.7678
= $ 2587204.37 (approx)
Present worth of 1-inch thick insulation = 2587204.37 - 112000 = $ 2475204.37
2-inch thick insulation:-
Capital cost = 280000 * 0.70 = $ 196000
Benefit from 1-inck thich insulation every year = (92 % of 1.80) * 280000 = $ 463680
Present value of benefit = 463680 * Cumulative P.V. factor for 10 Years $ 11.50 %
= 463680 * 5.7678
= $ 2674413.50 (approx)
Present worth of 2-inch thick insulation = 2674413.50 - 196000 = $ 2478413.50
No Insulation:-
Present value of heat loss = 280000 * 1.80 * 5.7678 = $ 2906971.20 ( No benefits at all.)
Conclusion:- Parker County Community College (PCCC) should use 2-inch thick insulation as the present worth of 2-inch thich insulation is higher than the present worth of 1-inch thick insulation.