A company is considering five different methods for recycling a petroleum deriva

Question

A company is considering five different methods for recycling a petroleum derivative from plastic containers. The investment costs and incomes are shown below. All methods have a 10-year life with zero salvage value. The company uses a MARR of15% per year. Using an Incremental Modified Benefit/Cost analysis, select the best method.

Method 1 2 3 4 5

First Cost, $ 15,000 19,000 45,000 33,000 48,000

Annual M & 0 Cost, $ 10,000 12,000 9,000 11,000 13,000

Annual lncome . ,$ 12,000 20,000 19,000 22,000 27,000

Explanation / Answer

Answer:

First rank the alternatives in terms of increasing initial investment cost, including do-nothing: DN, 1, 2, 4, 3, 5.

Next, compare the first two alternatives on an incremental basis:

DN vs 1

B = 12000
C = 15000 (A/P, 15%, 10) + 10000
    = 15000 * (0.19925) + 10000
    = 12988.75

B/C = 12000 / 12988.75 = 0.92 (so eliminate 1)

DN vs 2

B = 20000
C = 19000 (A/P, 15%, 10) + 12000
    = 19000 * (0.19925) + 12000
    = 15785.75

B/C = 20000 / 12988.75 = 1.27 (so eliminate DN)

2 vs 4 (4-2 analysis)

B = 22000-20000 = 2000
C = (33000-19000) (A/P, 15%, 10) + (11000-12000)
    = 14000 * (0.19925) - 1000
    = 1789.5

B/C = 2000 / 12988.75 = 1.12 (so eliminate 2)

4 vs 3 (3-4 analysis)

B = 19000-22000 = -3000
C = (45000 - 33000) (A/P, 15%, 10) + (9000-11000)
    = 12000 * (0.19925) - 2000
    = 391

B/C = -3000 / 391 = -7.67 (so eliminate 3)

4 vs 5 (5-4 analysis)

B = 27000 - 22000 = 5000
C = (48000 - 33000) (A/P, 15%, 10) + (13000-11000)
    = 15000 * (0.19925) + 2000
    = 4988.75

B/C = 5000 / 4988.75 = 1.002255 (so eliminate 4)

Chosse project 5

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