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Company D needs to decide which option to choose for their pipeline routings. Option Initial Cost 225,000,000 Annual Operatio

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Answer #1
A B
Initial Cost 225000000 350000000
PV of Annual Operation Cost
Annual Cost/ MARR		 428571429 85714286
PV of Maintenance cost per year for 20 Years
Maintenance cost * PVAF(7%, for 20 Years)		 529700000 317820000
Total Cost 1183271429 753534286

Option B is better as cost of option B is less than Option A at present

Working Notes

A B
Annual Operation Cost (a) 30000000 6000000
MRR (b) 7% 7%
PV of Annual Operation cost (a/b) 428571429 85714286
Maintenance Cost per every 20 years (a) 50000000 30000000
PVAF (7%,20 years) (b) 10.594 10.594
PV of Maintenance cost per year for 20 Years (a*b) 529700000 317820000

1. When the life of project is infinite, Present value (PV) of annual cost is calculated by dividing Annual cost by MRR

2. In case of maintenance cost, it is incurred annually for 20 years and to calculate present value of the same, Annual Maintenance cost is multiplied by Present value of annuity factor (PVAF) i.e. 10.594 in the given case

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