A hotel owner in a developing country depends on tourism for most of his business, and in order to maintain a high occupancy rate, advertises "Pure Drinking Water" on all of his bill boards, letterheads, and business cards. At present he is providing bottled water for his guests at a cost of # 1 to pay per gallon, but occasionally some guest drinks the tap water and becomes ill. was (The symbol # represents the adler, the currency unit of the country.) Because, he believes that every such illness is bad for his business, he is seeking an economical means of providing pure water for all guest consumption. There is an ample supply of water available in the town through a reasonably reliable pipe system, and at very low rates. That system is now being used for all sanitary and guest purposes except for drinking.

A visiting civil engineer has proposed to him that he install an automatic filtration and chlorination plant and process all the water he uses. After careful investigation he finds that he can buy such a unit in either of two sizes, 2,500 or 5,0p0 gallons per day. The 2,500 unit will be adequate for his immediate needs and for the next 5 years. After 5 years he expects to double the size of the hotel and will need to double the purification capacity.

The smaller unit will cost about #32,000 installed and will require maintenance and repairs costing about #500 a year. The larger unit will cost date of about #48,000, and annual maintenance and repairs will cost #750. Both units have estimated lives of 15 years with zero salvage value. The owner has decided to purchase one or the other of these units.

Chlorine is available in steel cylinders for #350 per cylinder. Each cylinder will treat 150,000 gallons of water. Diatomaceous earth, used in the filter, costs #60 per 100 pounds. A hundred pounds will filter 75,000 gallons of water. The foregoing rates apply to both units. However, electric energy to pump the water through the units will cost #20 per 1 00,000 gallons for the smaller unit and #15 per 1 00,000 gallons for the larger.

The owner wishes to select the unit under the assumption that he will need 1 ,000 gallons per day next year and that the need will increase by 350 gallons per day each year for the following 10 years. Thereafter it will remain constant at 4,500 gallons per day. The owner wants an i of 15% on any investment that can be deferred. There will be no income taxes.

Use the present-worth method to determine whether he should buy a small unit now and another one in 5 years or buy a large unit now. Make some type of sensitivity analysis to judge how sensitive your conclusion is to the iused and to the estimated rate of growth in demand for water.