Question

A chemical company is considering two types of incinerators to burn solid waste generated by a chemical operation. Both incinerators have a burning capacity of 20 tonnes per day. The following data have been compiled for comparison: Incinerator A Incinerator BI Installed cost $1300000 $750,000 Annual O&M costs $50,000 $81000 Service life (years) 23 Salvage value $60,000 $30000 Income taxes $35000 $30,000 If the firm's MARR is known to be 9%, determine the processing cost per tonne of solid waste incurred by each incinerator. Assume that incinerator B will be available in the future at the same cost. Equivalent Annual Cost: AEC(9%)A=$ AEC(9%)B=$ Processing cost per tonne: CA= per tonne Cg= per tonne Better choice:

Answer 1

Answer.

Particulars	Incinerators A	Incinerators B
Installed Cost	$1300000	$750,000
Salvage Cost	$60,000	$30,000
Servica Life	23	10
Depreciation= (Installed Cost-Salvage Cost)/Service Life	=(1300000-60000)/23	=(750000-30000)/10
	53,913	72,000
Annual O&M cost (Given)	50000	81000
PVAF OF $1 @9% for "n" years
PVAF= (1/(1+r)^n-1)/r	=(1-(1/(1+0.09)^23))/0.09	=(1-(1/(1+0.09)^10))/0.09
	9.580	6.418
PV OF $1 @ 9% for nth Year
PV = 1/(1+r)^n	=1/(1+0.09)^23	=1/(1+0.09)^10
	0.138	0.422
	Incinerators A	Incinerators B
PVAF OF Annualized Cost =(PVAF*Annualised Cost)	4,79,010.34	5,19,830.27
Add:- Intalled Cost	13,00,000.00	7,50,000.00
Less:- PV of Salvage Value	8,266.88	12,672.32
Total Cost	17,70,743.46	12,57,157.95
PVAF	9.580	6.418
Equivalent Annual Cost = TOTAL COST/PVAF	184834	195890
Now it is assume that processing would be continue for whole year i.e 365 days @ 20 tonnes per days
So, Processing Cost Per tonne= Equivalent Cost /365*20	=184834/365*20	=195890/365*20
	10,128	10,734

Incinerator A Should be Accepted as it's Equivalent Annual Cost is lower.

Note:- Answer would be different rate of Income tax would be given in question, Suppose Rate of Income tax is 20% then we have to reduce the processing cost by 20% of depreciation i.e tax saving due to depreciation. Further noted that the given answer is on Cash Flow basis so we are ignoring depreciation.