A4-5 A production facility is currently utilizing carbon steel tubing. The cur- rent process will require injection of chemicals to control tubing corro- sion due to high temperatures and pressures and corrosive chlorides in the transported product. It is proposed to replace the carbon steel that cost $12 per foot with an installation cost of $125,000 both incurred one year ago, with chrome stainless steel tubing that would cost $68 per foot today (time zero). 20,000 feet of tubing would be required and installation costs are estimated to total $500,000 (also at time zero). Annual cost savings in chemicals, labor and chemical injection equip- ment are projected to be $550,000 in year 1 following the installation of the new tubing with savings escalating at an annually compounded rate of 7% per year in succeeding years beginning in year 2. For sim- plicity, use a 6-year evaluation life with a salvage value of zero at the end of year 6. Assume a 15% minimum ROR. Identify the two mutu- ally exclusive service alternatives in time diagram format and evaluate each with present worth cost analysis. Support your cost findings using incremental NPV and ROR analyses to determine if installation of the chrome tubing is economically desirable. Assume the existing carbon steel tubing has no salvage value today, at time zero. A4-5 A production facility is currently utilizing carbon steel tubing. The cur- rent process will require injection of chemicals to control tubing corro- sion due to high temperatures and pressures and corrosive chlorides in the transported product. It is proposed to replace the carbon steel that cost $12 per foot with an installation cost of $125,000 both incurred one year ago, with chrome stainless steel tubing that would cost $68 per foot today (time zero). 20,000 feet of tubing would be required and installation costs are estimated to total $500,000 (also at time zero). Annual cost savings in chemicals, labor and chemical injection equip- ment are projected to be $550,000 in year 1 following the installation of the new tubing with savings escalating at an annually compounded rate of 7% per year in succeeding years beginning in year 2. For sim- plicity, use a 6-year evaluation life with a salvage value of zero at the end of year 6. Assume a 15% minimum ROR. Identify the two mutu- ally exclusive service alternatives in time diagram format and evaluate each with present worth cost analysis. Support your cost findings using incremental NPV and ROR analyses to determine if installation of the chrome tubing is economically desirable. Assume the existing carbon steel tubing has no salvage value today, at time zero
