4. (15 points) A city wastewater treatment plant is working on a project to recl

Question

4. (15 points) A city wastewater treatment plant is working on a project to reclaim energy from waste methane generated by the plant's anaerobic digester. The project cost is anticipated at $1,050,000. The digester will cost $25,000 per year to operate. The digester will require major rebuilding at year 10 and year 20 at a cost of $100,000 per rebuild. The project will generate energy cost savings to the plant of S165,000 per year. The project life is 30 years; there is no significant salvage value at project end. Use CONVENTIONAL BENEFIT-COST ANALYSIS to determine whether the project is worth pursuing. Use a MARR of 15%.

Explanation / Answer

The initial cost of digester is $1,050,000

Per year operational cost = $25,000

Rebuilding cost after 10 years = $100,000

Rebuilding cost after 20 years = $100,000

Project life = 10 years

MARR = 15%

Calculate the present worth of the cost of digester -

PW = $1,050,000 + $25,000(P/A, 15%, 30) + $100,000(P/F, 15%, 10) + $100,000(P/F, 15%, 20)

PW = $1,050,000 + ($25,000 * 6.5660) + ($100,000 * 0.2472) + ($100,000 * 0.0611)

PW = $1,050,000 + $164,150 + $24,720 + $6,110

PW = $1,244,980

The present worth of the cost of digester is $1,244,980

Per year saving from digester = $165,000

Project life = 10 years

MARR = 15%

Calculate the present worth of benefits of the digester -

PW = $165,000 (P/A, 15%, 30)

PW = $165,000 * 6.5660

PW = $1,083,390

The present worth of the benefit of the digester is $1,083,390

Calculate the conventional benefit-cost ratio -

Conventional B-C ratio = PW of benefits/PW of cost

Conventional B-C ratio = $1,083,390/$1,244,980 = 0.87

The conventional Benefit/Cost ratio of project is 0.87

The value of conventional B/C ratio have to be equal to or greater than 1 to make the project worth pursuing.

The conventional B/C ratio of digester is 0.87 which is less than 1.

So,

The project is not worth pursuing.

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