7-37. An industrial coal-fired boiler for process steam is equipped with a 10-ye
ID: 2643111 • Letter: 7
Question
7-37. An industrial coal-fired boiler for process steam is equipped with a 10-year-old electrostatic precipitator (ESP). Changes in coal quality have caused stack emissions to be in noncompliance with federal standards for particulates. Two mutually exclusive alternatives have been proposed to rectify this problem (doing nothing is not an option).
New Baghouse New ESP
Capital investment $1,140,000 $992,500
Annual operating expenses 115,500 73,200
The life of both alternatives is 10 years, the effective income tax rate is 40%, and the after-tax MARR is
Explanation / Answer
We need to compute NPV of both the projects to compare these projects assuming MARR to be %
Baghouse project
Annual depreciation = (cost of asset – salvage value)/ Life
= ($1140, 000 -0)/ 10
= $114,000
Annual operating cash outflow = (annual operating expenses + depreciation) x(1- tax rate) - Depreciation
= ($115,500 + $114,000) x(1-0.40) - $114,000
= 23,700
NPV = PV of cash flows - initial investment
= PVIFA( 10%, 10) x (– 23,700) -1,140,000
= 6.144567 x (-23700) -1,140,000
= $1,285,626.24
NEW ESP project
Annual depreciation = (cost of asset – salvage value)/ Life
= ($992500 -0)/ 10
= $99,250
Annual operating cash outflow = (annual operating expenses + depreciation) x(1- tax rate) - Depreciation
= ($73200+ $99250) x(1-0.40) - $99250
= $33,500
NPV = PV of cash flows - initial investment
= PVIFA( 10%, 10) x (– 33,500) -992500
= 6.144567 x (-33,500) -992500
= $1,198,343
Since NPV of New ESP project is higher, New ESP project should be selected.
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