A steam bo iler is needed as part of the design of a new plant. The boiler can b
ID: 2774284 • Letter: A
Question
A steam boiler is needed as part of the design of a new plant. The boiler can be fired by natural gas,
fuel oil, or coal. A decision must be made on which fuel to use. An analysis of the costs shows that the
installed cost, with all controls, would be least for natural gas at $30,000; for fuel oil it would be
$55,000; and for coal it would be $180,000. If natural gas is used rather than fuel oil, the annual fuel
cost will increase by $7500. If coal is used rather than fuel oil, the annual fuel cost will be $15,000 per
year less. Assuming 8% interest, a 20-year analysis period and no salvage value, use a present worth
analysis to determine the most economical installation.
Explanation / Answer
SInce the annual fuel cost for fuel oil is not given, we will take that as the base case and calculate the present value of natural gas and fuel with respect to to fuel oil and hence determine the most economical installation.
Incremental initial cost for natural gas with respect to fuel oil = 30000 - 55000 = -$25,000
Incremental initial cost for coal with respect to fuel oil = 180000 - 55000 = $125,000
Based on the above table,
NPV of natural gas with respect to fuel oil = -$48636
NPV of coal with respect to fuel oil = $22272
Thus, the most economical installation would be to use coal to fire the boiler.
Incremental Cash Flows With Respect to Fuel Oil Year Natural Gas Discounted Cash Flow - Natural Gas Coal Discounted Cash Flow - Coal 0 25000 25000 -125000 -125000 1 -7500 -6944 15000 13889 2 -7500 -6430 15000 12860 3 -7500 -5954 15000 11907 4 -7500 -5513 15000 11025 5 -7500 -5104 15000 10209 6 -7500 -4726 15000 9453 7 -7500 -4376 15000 8752 8 -7500 -4052 15000 8104 9 -7500 -3752 15000 7504 10 -7500 -3474 15000 6948 11 -7500 -3217 15000 6433 12 -7500 -2978 15000 5957 13 -7500 -2758 15000 5515 14 -7500 -2553 15000 5107 15 -7500 -2364 15000 4729 16 -7500 -2189 15000 4378 17 -7500 -2027 15000 4054 18 -7500 -1877 15000 3754 19 -7500 -1738 15000 3476 20 -7500 -1609 15000 3218 NPV - Natural Gas -48636 NPV - Coal 22272Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.