Answered step by step
Verified Expert Solution
Question
1 Approved Answer
An electrical utility is experiencing a sharp power demand that continues to grow at a high rate in a certain local area. Two alternatives are
An electrical utility is experiencing a sharp power demand that continues to grow at a high rate in a certain local area. Two alternatives are under consideration. Each is designed to provide enough capacity during the next 25 years, and both will consume the same amount of fuel, so fuel cost is not considered in the analysis. Alternative A. Increase the generating capacity now so that the ultimate demand can be met without additional expenditures later. An investment of $22 million would be required, and it is estimated that this plant facility would be in service for 25 years and have a salvage value of $0.9 million. The annual operating and maintenance costs (including income taxes) would be $0.6 million. Alternative B. Spend $11 million now and follow this expenditure with future additions during the 10th year and the 15th year. These additions would cost $14 million and $8 million, respectively. The facility would be sold 25 years from now with a salvage value of $1.75 million. The annual operating and maintenance costs (including income taxes) will be $250,000 initially and will increase to $0.35 million after the second addition (from the 11th year to the 15th year) and to $0.45 million during the final 10 years. (Assume that these costs begin one year subsequent to the actual addition.) On the basis of the present-worth criterion, if the firm uses 12% as a MARR, which alternative should be undertaken? Note: Adopt incremental cost approach. The present worth of Alternative A is $ million. (Round to one decimal place.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started