Question
3. A corporate owner of an existing industrial plant wants to provide space heating for the plant at the lowest cost. She has been given
3. A corporate owner of an existing industrial plant wants to provide space heating for the plant at the lowest cost. She has been given two alternatives to consider: (1) Continue use of existing oil-fired furnace using No. 2 fuel oil without modification of the system. (2) Purchase and install a waste heat recovery system to the jacket of the plant exhaust stack to supplement the existing space heating furnace and reduce its consumption of fuel oil by 90 %. The data and assumptions provided by the consultants are displayed in Table Q3. [Ignore inflation and taxes] (20 marks) (a) (i) Calculate the NPV of fuel costs over the seven year period for Alternative 1 (without waste-heat recovery system)
(ii) Calculate the NPV of the operation and maintenance costs over the seven year period of Alternative 1 (without waste-heat recovery system).
(iii) Calculate the life cycle costs of continuing use of the existing furnace without addition of the heat recovery system over the seven year period.
(b) Calculate the life cycle costs in terms of NPV of Alternative 2, that is supplementing the existing heating system with a waste heat recovery system. Take into account fuel costs, purchase and installation costs of the heat recovery system, resale value and non-fuel operation and maintenance costs with addition of waste heat recovery system.
(c) Briefly discuss which alternative is the preferred one and give reasons why.
TABLE Q3 Sample Investment Problem: Data and Assumptions Study period (investor's holding period) 7 years Discount rate 15 % Investment cost data Purchase and installation 35,000 Resale value at end of 7 years 34,208 Recurring Operation and Maintenance (nonfuel) costs Existing furnace 500/year Waste heat recovery system 200/year Energy costs Fuel consumption for space heating without waste heat recovery:1000 MBtu/year Fuel consumption for space heating with waste heat recovery: 100 MBtu/year Base year fuel price: 7/MBtu A A relatively short study period was selected for this example to facilitate a year-by- year display of costs. Nonfuel O and M costs for the existing furnace are assumed to be unchanged by addition of the waste-heat recovery system. TABLE Q3 Sample Investment Problem: Data and Assumptions Study period (investor's holding period) 7 years Discount rate 15 % Investment cost data Purchase and installation 35,000 Resale value at end of 7 years 34,208 Recurring Operation and Maintenance (nonfuel) costs Existing furnace 500/year Waste heat recovery system 200/year Energy costs Fuel consumption for space heating without waste heat recovery:1000 MBtu/year Fuel consumption for space heating with waste heat recovery: 100 MBtu/year Base year fuel price: 7/MBtu A A relatively short study period was selected for this example to facilitate a year-by- year display of costs. Nonfuel O and M costs for the existing furnace are assumed to be unchanged by addition of the waste-heat recovery systemStep by Step Solution
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