You have a pipeline with corrosion problems, and can either... Pay for injection

Question

You have a pipeline with corrosion problems, and can either...

Pay for injection treatment at $600,000 in year one and escalating by 6% per year in years 2-6.

-or-

Repalce the 20,000 feet of piping (that was $32 per foot last year) with a stell piple at a cost of $80 per foot plus $750,000 of installation costs, all at time zero (now).

There is no resell value for the old piping, and the minimum Rate of Return is 12%.

Calculate the present worth cost of each option in time zero, and compute the incremental net present value (Inc. NPV). What is the best choice?

Explanation / Answer

the injection cost= $600,000 and elscalating 6% interest per year from 2 to 6 years.

= $600,000 X 3.974= 2,384,400

the installation cost of the pipe line is :

20,000 foot, $80 per foot and installation cost of 750,000

the total cost= (20,000 X80) + $750,000= $950,000

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