A plastic-manufacturing company owns and operates a polypropylene-production fac
ID: 2456492 • Letter: A
Question
A plastic-manufacturing company owns and operates a polypropylene-production facility that converts the propylene from one of its cracking facilities to polypropylene plastics for outside sale. The polypropylene-production facility is currently forced to operate at less than capacity due to lack of enough propylene-production capacity in its hydrocarbon-cracking facility. The chemical engineers are considering alternatives for supplying additional propylene to the polypropylcne-production facility. Some of the feasible alternatives arc as follows: Build a pipeline to the nearest outside supply source. Provide additional propylene by truck from an outside source. The engineers also gathered the following projected cost estimates: Future costs for purchased propylene, excluding delivery: $0.215 per lb Cost of pipeline construction: $200,000 per pipeline mile Estimated length of pipeline: 180 miles Transportation costs by tank truck: $0.05 per lb. using a common carrier Pipeline operating costs: $0,005 per lb. excluding capital costs Projected additional propylene needs: 180 million lbs per year Projected project life: 20 years Estimated salvage value of the pipeline: 8% of the installed costs Determine the propylene cost per pound under each option if the firm's MARR is 18%. Which option is more economical?Explanation / Answer
Option 1: Build a pipeline to the nearest outside supply source.
Cost of Pipeline = $200,000 * $180 miles = $36,000,000
Salvage Value = 36,000,000 * 8% =2,880,000
Depritiation per annum = (36,000,000 - 2,880,000) / 20 years = 1,656,000
Projected Propylene needs = 180 millions
Depritiation per unit = 1656000 / 180 millions = $0.0092
Operating cost = $0.005 per lb
Total cost under option 1 = 0.215 + 0.0092 + 0.005 = 0.2292 per lb
Option 2: provide additional propylene by truck from an outside source
Transportation cost = $0.05 per lb
Total Cost under option 2 = 0.215 + 0.05 = 0.265
Option 1 is economical
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