7. An oil plant 1500 meters mm and 120 mm pipes are being considered. (20 points

Question

7. An oil plant 1500 meters mm and 120 mm pipes are being considered. (20 points) a pipelioe to consect storage tanks to a prcessing years 600 600 For this analysis, the company will use an annual interest rate their costs are incurred of 10% Annual maintenance and to be paid in their entireties at the end of the years in which (a) Disregarding the initial and replacement pipe costs, what is the capitalized cos of he maintenance and pumping costs for the 180 mm pipe? What is the depreciation allowance for the 120 mm pipe in the first year? Use MACRS depreciation assuming a 5-year life. (b)

Explanation / Answer

a) MAINTENACE AND PUMPING COSTS Present Value (PV) of Cash Flow: (Cash Flow)/((1+i)^N) i=Discount Rate=10%=0.1 N=Year of Cash Flow Annual maintenance $200 Annual Pumping Cost $600 (600*$1) Maintenance and Pumping cost $800 (200+600) N A B=A/(1.1^N) Year Annual Cost PV of annualcost 1 $800 727.2727273 2 $800 661.1570248 3 $800 601.0518407 4 $800 546.4107643 5 $800 496.7370584 6 $800 451.579144 7 $800 410.5264946 8 $800 373.2059042 SUM 4267.940958 Capitalized cost of maintenance and pumping $4,268 b) DEPRECIATION ALLOWANCE Depreciable asset value(120mm pipe) $2,500 A B=A*2500 Year MACRS 5 year Rate Depreciation 1 20% $               500 2 32% $               800 3 19.20% $               480 4 11.52% $               288 5 11.52% $               288 6 5.76% $               144 Depreciation allowance in first year $                  500 (120mmpipe) c) Present Worth of 120mmpipe Initial cost $2,500 Salvage value $300 Present worth of salvage value $                  140 (300/(1.1^8) Net Cost of pipe $2,360 (2500-140) Annual maintenance $300 Annual Pumping Cost $900 (600*$1.5) Maintenance and Pumping cost $1,200 (300+900) N A B=A/(1.1^N) Year Annual Cost PV of annualcost 1 $1,200 1090.909091 2 $1,200 991.7355372 3 $1,200 901.5777611 4 $1,200 819.6161464 5 $1,200 745.1055877 6 $1,200 677.3687161 7 $1,200 615.7897419 8 $1,200 559.8088563 SUM 6401.911437 Capitalized cost of maintenance and pumping $6,402 Present worth of 120mm pipe $8,762 (2360+6402) d) If operating cost increases to $1.75 for 180mmpipebegining in year 5 Annual maintenance $200 Annual Pumping Cost(Year 1 to 4) $600 (600*$1) Maintenance and Pumping cost(year 1 to 4) $800 (200+600) Annual Pumping Cost(Year 5 to 8) $1,050 (600*$1.75) Maintenance and Pumping cost(year 5 to 8) $1,250 (200+1050) N A B=A/(1.1^N) Year Annual Cost PV of annualcost 1 $800 727.2727273 2 $800 661.1570248 3 $800 601.0518407 4 $800 546.4107643 5 $1,250 776.1516538 6 $1,250 705.5924126 7 $1,250 641.4476478 8 $1,250 583.1342253 SUM 5242.218297 Capitalized cost of maintenance and pumping $5,242 InitialCost $3,500 Salvage Value $400 Present worth of salvage value $                  187 (400/91.1^8) Present worth of 180mm pipe $8,556 (5242+3500-187)

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