Question

An environmental consultant is considering the installation of a water storage tank for a client. The tank is estimated to have an initial cost of $309,000, and annual maintenance costs are estimated to be $7,100 per year. As an alternative, a holding pond can be provided a short distance away at an initial cost of $225,000 for the pond plus $90,000 for pumps and piping. Annual operating and maintenance costs for the pumps and holding pond are estimated to be $16,000. The planning horizon is 20 years, and at that time, neither alternative has any salvage value.
Required:
Determine the preferred alternative based on a present worth analysis with a MARR of 20 percent/year.

Answer 1

Answer:

The preferred alternative based on a present worth analysis with a MARR of 20% per year is:

the Installation of a water Storage Tank

Explanation:

a) Data and Calculations:

MARR = 20% per year

Time period or planning horizon = 20 years

                                                   Alternatives

                                               Tank              Pond

Initial costs                           $309,000      $315,000 ($225,000 + $90,000)

Annual maintenance costs         7,100          16,000

PV annuity factor                        4.870            4.870

Total PV: maintenance cost  $34,577        $77,920 ($16,000 * 4.870)

Total PW costs                     $343,577      $392,920 ($315,000 + $77,920)

Present worth is the same as the present value (PV) of a future amount, discounted to the present using a specified rate.