Question

An electrical utility is experiencing a sharp power demand that continues to grow at a high rate in a certain local area. Two alternatives are under consideration. Each is designed to provide enough capacity during the next 25 years, and both will consume the same amount of fuel, so fuel cost is not considered in the analysis. • Alternative A. Increase the generating capacity now so that the ultimate demand can be met without additional expenditures later. An investment of $27 million would be required, and it is estimated that this plant facility would be in service for 25 years and have a salvage value of $1.0 million. The annual operating and maintenance costs (including income taxes) would be 50.3 million. • Alternative B. Spend $11 million now and follow this expenditure with future additions during the 10th year and the 15th year. These additions would cost $15 million and $7 million, respectively. The facility would be sold 25 years from now with a salvage value of $1.25 million. The annual operating and maintenance costs (including income taxes) will be $350,000 initially and will increase to $0.45 million after the second addition (from the 11th year to the 15th year) and to $0.55 million during the final 10 years. (Assume that these costs begin one year subsequent to the actual addition.) On the basis of the present worth criterion, if the firm uses 10% as a MARR, which alternative should be undertaken? Note: Adopt incremental cost approach. Click the icon to view the interest factors for discrete compounding when i -10% per year. The present worth of Alternative Ais million (Round to one decimal place.) The present worth of Alternative Bis million (Round to one decimal place.) On the basis of the present worth criterion, which alternative should be undertaken? Choose the correct answer below. O O Alternative A Alternative B

Answer 1

Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks!

Alternative A			$ millions
Particulars	Y0	Y1-25	Y 25
Investment	(27.00)	-	-
Operating Expenses		(0.30)
Salvage Value			1.00
Net costs	(27.00)	(0.30)	1.00
Factor @ 10%	1.00	9.0770	0.0923
Present Value	(27.00)	(2.72)	0.09
Net Present Value			(29.63)

Alternative B	$ millions
Particulars	Y0	Y1	Y2	Y3	Y4	Y5	Y6	Y7	Y8	Y9	Y10	Y11	Y12	Y13	Y14	Y15	Y16	Y17	Y18	Y19	Y20	Y21	Y22	Y23	Y24	Y25
Investment	(11.00)	-	-	-	-	-	-	-	-	-	(15.00)	-	-	-	-	(7.00)	-	-	-	-	-	-	-	-	-	-
Operating Expenses	-	(0.35)	(0.35)	(0.35)	(0.35)	(0.35)	(0.35)	(0.35)	(0.35)	(0.35)	(0.35)	(0.45)	(0.45)	(0.45)	(0.45)	(0.45)	(0.55)	(0.55)	(0.55)	(0.55)	(0.55)	(0.55)	(0.55)	(0.55)	(0.55)	(0.55)
Salvage Value	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	1.25
Net costs	(11.00)	(0.35)	(0.35)	(0.35)	(0.35)	(0.35)	(0.35)	(0.35)	(0.35)	(0.35)	(15.35)	(0.45)	(0.45)	(0.45)	(0.45)	(7.45)	(0.55)	(0.55)	(0.55)	(0.55)	(0.55)	(0.55)	(0.55)	(0.55)	(0.55)	0.70
Factor @ 10%	1.00	0.9091	0.8264	0.7513	0.6830	0.6209	0.5645	0.5132	0.4665	0.4241	0.3855	0.3505	0.3186	0.2897	0.2633	0.2394	0.2176	0.1978	0.1799	0.1635	0.1486	0.1351	0.1228	0.1117	0.1015	0.0923
Present Value	(11.00)	(0.32)	(0.29)	(0.26)	(0.24)	(0.22)	(0.20)	(0.18)	(0.16)	(0.15)	(5.92)	(0.16)	(0.14)	(0.13)	(0.12)	(1.78)	(0.12)	(0.11)	(0.10)	(0.09)	(0.08)	(0.07)	(0.07)	(0.06)	(0.06)	0.06
Net Present Value	(21.96)
Net Present Value is less for alternative B. So it should be undertaken.