Jenny is an engineer for a municipal power plant. The plant uses natural gas, wh

Question

Jenny is an engineer for a municipal power plant. The plant uses natural gas, which is currently provided from an existing pipeline at an annual cost of $10000 per year. Jenny is considering a project to construct a new pipeline. The initial cost of the new pipeline would be $35000, but it would reduce the annual cost to $5000 per year. Assume an analysis period of 20 years and no salvage value for either the new or existing pipeline. The interest rate is 6%.  Show work

a) Determine the equivalent uniform annual cost (EUAC) for the new pipeline.
b) Should the new pipeline be built?

Explanation / Answer

(a) EUAC = $5,000 + $35,000 (A/P, 6%, 20) = $5,000 + $35,000 (0.0872) = $8,052 (b) Since the EUAC of the new pipeline is less than the $10,000 annual cost of the existing pipeline, it should be constructed.

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