Problem 2. (20 pts). Dow Chemical is considering two types of incinerators to bu

Question

Problem 2. (20 pts). Dow Chemical is considering two types of incinerators to burn solid waste generated by their chemical operation. Both incinerators have a burning capacity of 50 tons per day. Dow's MARR is known to be 12%. The following data have been compiled for comparison of the two incinerators: ITEM INCINERATOR A $1,250,000 $70,000 20 years INCINERATOR B $850,000 $90,000 15 years INSTALLED COST ANNUAL O&M; COSTS SERVICE LIFE SALVAGE VALUE $125,000 $75,000 INCOME TAXES $30,000 $55,000 Page 2 of 2 You are an engineering that was hired by Dow to determine the processing cost per ton of solid waste for each incinerator. Assume that incinerator B will be will be available in the future at the same cost. Calculate the annual equivalent costs of the two incinerators (10 pts) and the processing cost per ton (5 pts). Which incinerator is better and why (5 pts)? (Based on problem 6.50)

Explanation / Answer

Present value of cost of Incinerator A = $1,250,000 * 1 + $ 70,000*PVAF (12%,20 years) - ($125000 - $30000) * PVF (12%, 20 years) = $1,763,012.71

Annual equivalent costs = $1763012.71 / PVAF (12%,20 years) = $236,030

Processing cost per ton = $1763012.71 / (20*365*50) = $ 4.83/ton

Now Present value of cost of Incinerator B =$850,000+ $ 90000*PVAF (12%,15 years) - ($75000 - $55000) * PVF (12%, 15 years) = $1,459,323.88

Annual equivalent costs = $1,459,323.88 / PVAF (12%,15 years) = $214,264.12

Processing cost per ton = $1,459,323.88 / (15*365*50) = $ 5.33/ton

Incinerator B is better because its annual equivalent cost is lesser than Incinerator A.

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