A civil engineer tries to decide between 2 operating pressures for a water irrigation system on a farm, and you have 2 alternatives: 1. If a high pressure system is used, less pipes and more sprinklers will be required, but pumping costs would be higher o The cost of pumping is estimated at $ 3 for every 1000 m3 of wastewater pumped at high pressure. For this alternative, 25 sprinklers will be required at a price of $ 30 each and an additional 1000 m of aluminum pipe at $ 9 per m. o In the case of high pressure pipes, revenues of $ 8,500 are expected from the first year onwards. 2. The other alternative is to use less pressure, but more sprinklers. o If the low pressure system is used, the pumping cost will be $ 2 per 1000 m3. o In addition, 85 sprinklers and 4000 m of pipe will be required. o In the case of low pressure, income of $ 15,000 is considered from the first year onwards. Additionally: The aluminum pipe is expected to last 10 years and the sprinklers 5 years (consider re-investment at year 5). The volume of water to be pumped per year is calculated at 500,000 m3, from this volume determine the cost. The minimum attractive rate is 20% per year and the analysis horizon is 10 years. It is assumed that the salvage value of the pipeline in both cases is 10%. It is not considered taxes of any kind, or any depreciation. Assume that for point 0 (zero), the only costs are: pipeline and sprinkler costs. From year 1, pumping costs are considered.

ASKED:

What is the NPV of the High Pressure alternative?

Question 2

Based on the statement of the exercise explained in the previous question.

ASKED: What is the NPV of the Low Pressure alternative?

Question 3

Based on the statement of the exercise explained in question # 1.

ASKED: What is the IRR of the High Pressure alternative? (use 4 decimal places in your answer)

Question 4

Based on the statement of the exercise explained in question # 1.

ASKED: What is the IRR of the Low Pressure alternative? (use 4 decimal places in your answer)

Question 5

Based on all the previous answers, the question is:

Which pressure should be selected?

Base your answer on the NPV and IRR criteria.

Select one:

a. The High Pressure one because its NPV and its IRR are higher than those of the other alternative

b. Low Pressure, since its NPV and IRR are higher than those of the other alternative

c. I choose the High Pressure one because although its NPV is slightly lower than the Low Pressure one, its IRR is much better.

d. In both alternatives, the NPV is negative and you should not look for another more convenient way of doing the project.