Question

2. Project Selection II Wastewater treatment plants require an aerator in their activated sludge unit. Two options exists and their characteristics are provided in the table below. The city's MARR is 8%. Determine which aerator to purchase Aerator A Aerator A 400,000 Initial Cost (S) 200,000 75,000 Annual Operating Cost (S)60,000 60,000 10 Salvage Value (S) 20,000 Aerator Lifetime

Answer 1

We will Compare the two Aerator through NPV (Net Present Value) approach

For Aerator A

NPV = -400000-60000(P/A,8%,10)+60000(P/F,8%,10)

NPV = -400000-60000*6.710+60000*0.4632 (Values from compound interest table)

NPV= -400000-402600+27792

NPV= -774808

For Aerator B

NPV = -200000-75000(P/A,8%,5)+20000(P/F,8%,5)

NPV= -200000-75000*3.993+20000*0.6806

NPV= -485863

Since NPV of Aerator B is more positive than NPV of Aerator A, therefore Aerator B is choosen i.e 2nd option