A new engineer is evaluating whether to use a larger-diameter pipe for a water l

Question

A new engineer is evaluating whether to use a larger-diameter pipe for a water line. It will cost $350,000 more initially, but it will reduce pumping costs. The optimistic, most-likely, and pessimistic projections for annual savings are $30,000, $20,000, and $5,000, with respective probabilities of 20%, 50%, and 30%. The interest rate is 6-8%, and the water line should have a life of 40 years. a) What is the PW for each estimated value? What is the expected PW? b) Compute the expected annual savings and expected PW.

Explanation / Answer

cost intially incurred =350000 annual savings=cash flows =30000 ,20000 ,5000 probabilities =0.2 ,0.5 ,0.3 interest rate =6-8% time =40 years. a>pw 1 = 30000*0.2 =6000 2=20000*0.5=10000 3=5000*0.3=1500 expected PW =6000+10000+1500=17500 expected annual savings =17500 expected PW =17500*40(interest factor) =237243.22 cheers :)

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