You are an engineer at a manufacturing plant that often changes machine layouts to accommodate production of new products. Over the years, the compressed air piping has been reconfigured many times. The current piping has some abandoned sections that are ageing. The current system is inefficient and has numerous leaks. A project is being considered to remove the old piping to reduce the amount of time the air compressor must run, thereby saving electricity.

Currently, the 260kW compressor motor runs 70% of the time with an electricity cost of $0.05/kWh. The plant operates 250 days / year, 24 hours / day.

Doing nothing, the leaks will continue to worsen. The compressor runtime will increase by 7% / year for the next 5 years. By then, it will be unable to meet the needs of the plant.

You have proposed a design to replace the piping now, which will cost $28,500. You have determined that doing so will reduce the air compressor runtime to 54% and will remain steady.

If the company uses a discount rate of 12% on these types of investments, should the project be approved, based on a present value approach? (Hint: this is a decision to choose the least penalizing equivalent value.)

a) Create cash flow diagrams for both scenarios. b) Determine which option is better and why.

Assume that this project can be implemented at the end of this year and the plant will have already incurred the cost of running the compressor at its current level this year. All potential gains would start from next year.