Depreciation / Future Cost/Worth A firm needs to expand its manufacturing capaci

Question

Depreciation / Future Cost/Worth

A firm needs to expand its manufacturing capacity. The present facility could be expanded to meet the needs at a cost of $1.5 million. Waste treatment costs for the expanded facility would be about $190,000 per year. An entirely new facility that would reduce waste production could be built for approximately $3.65 million. The new facility would have an estimated annual waste treatment cost of $61,000. Assume an 18-year useful life for the facilities and zero salvage value or depreciation for both. If the discount rate is 9%, which alternative is preferable?

Explanation / Answer

Present worth of expanded facility: First cost $ 1,500,000 PW of annual waste treatment cost = 190000*(1.09^18-1)/(0.09*1.09^18) = $ 1,663,569 Total PW $ 3,163,569 Present worth of new facility: First cost $ 3,650,000 PW of annual waste treatment cost = 61000*(1.09^18-1)/(0.09*1.09^18) = $      534,093 Total PW $ 4,184,093 As the expansion has the lower PW Cost, it is preferable.

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