Question

Parker County Community College (PCCC) is trying to determine whether to use no insulation or to use insulation that is either 1 inch thick or 2 inches thick on its steam pipes. The heat loss from the pipes without insulation is expected to cost $1.60 per year per foot of pipe. A 1-inch thick insulated covering will eliminate 72 % of the loss and will cost $0.45 per foot. A 2-inch thick insulated covering will eliminate 92 % of the loss and will cost $0.80 per foot. PCCC Physical Plant Services estimates that there are 275,000 feet of steam pipe on campus. The PCCC Accounting Office requires a 7.0 %/year return to justify capital expenditures. The insulation has a life expectancy of 10 years. Click here to access the TVM Factor Table Calculator What is the present worth of each option? No insulation: $ 1-inch insulation: $ 2-inch insulation: $

Answer 1

No insulation

Initial cost =0

Annual cost=1.6*275000=$440000

PW of annual cost for 10 years at 7% will be given by 440000*(P/A,7%,10)=440000*7.0236=$3090375.88

Hence PW of no insulation is $3090375.88

1 inch insulation

Initial cost=0.45*275000=$123750

Annual cost=1.6*275000*(1-72%)=440000*0.28=$123200

PW of annual cost for 10 years at 7% will be given by 123200*(P/A,7%,10)=123200*7.0236=$865307.52

Hence PW of 1 inch insulation is 123750+865307.52=$989057.52

2 inch insulation

Initial cost=0.8*275000=$220000

Annual cost=1.6*275000*(1-92%)=440000*0.08=$35200

PW of annual cost for 10 years at 7% will be given by 35200*(P/A,7%,10)=35200*7.0236=$247230.72

Hence PW of 2 inch insulation is 220000+247230.72=$467230.72