The supervisor of a community swimming pool has developed two methods for chlori
ID: 2613382 • Letter: T
Question
The supervisor of a community swimming pool has developed two methods for chlorinating the pool. If gaseous chlorine is added, a chlorinator will be required that has an initial cost of $8000 and a useful life of 5 years. The chlorine will cost $650 per year, and the labor cost will be $800 per year. Alternatively, dry chlorine can be added manually at a cost of $1000 per year for chlorine and $1900 per year for labor. Which method should be used on the basis of a present worth analysis if the interest rate is 10% per year?
Explanation / Answer
Answer:
The present value under option 2, i.e use of dry chlorine has lower present value of outflow. Hence alternative 2 should be choosen.
Alternative 1: Use of chlorinator Yearly cash outflow= $650+$800 = $1,450 year Cash outflows (in$) Discount factors @ 10% Discounted cash outflow (in$) 0 8000 1 8000 1 1450 0.909091 1318.18 2 1450 0.826446 1198.35 3 1450 0.751315 1089.41 4 1450 0.683013 990.37 5 1450 0.620921 900.34 PV of cash outflow = 13496.64Related Questions
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