A large refinery and petrochemical complex is planning to manufacture caustic soda, which will use 10,000 gallons of feed water per day. Two types of feed-water storage installation are being considered to serve over 40 years of useful life:Option 1: Build a 20,000-gallon tank on a tower. The cost of installing the tank and tower is estimated to be $164,000. The salvage value is estimated to be negligible.Option 2: Place a 20,000-gallon tank of equal capacity on a hill that is150 yards away from the refinery. The cost of installing the tank on the hill, including the extra length of service lines, is estimated to be $120,000 with negligible salvage value. Because of its hill location, an additional investment of $12,000 in pumping equipment is required. The pumping equipment is expected to have a service life of 20 years with a salvage value of $1,000 at the end of that time. The annual operating and maintenance cost (including any income-tax effects) for the pumping operation is estimated at $1,000.If the firm's MARR is known to be 12%, which option is better, calculated on the basis of the present-worth criterion? At an interest rate of 12%, compare the net present worth of each option over eight years.

Given: 10,000 gallons of feed water per day Useful life: 40 years Option 1: Build a 20,000-gallon…

Answered: A large refinery and petrochemical…

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 51P: Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new...

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A large refinery and petrochemical complex is planning to manufacture caustic soda, which will use 10,000 gallons of feed water per day. Two types of feed-water storage installation are being considered to serve over 40 years of useful life:

Option 1: Build a 20,000-gallon tank on a tower. The cost of installing the tank and tower is estimated to be $164,000. The salvage value is estimated to be negligible.
Option 2: Place a 20,000-gallon tank of equal capacity on a hill that is
150 yards away from the refinery. The cost of installing the tank on the hill, including the extra length of service lines, is estimated to be $120,000 with negligible salvage value. Because of its hill location, an additional investment of $12,000 in pumping equipment is required. The pumping equipment is expected to have a service life of 20 years with a salvage value of $1,000 at the end of that time. The annual operating and maintenance cost (including any income-tax effects) for the pumping operation is estimated at $1,000.
If the firm's MARR is known to be 12%, which option is better, calculated on the basis of the present-worth criterion? At an interest rate of 12%, compare the net present worth of each option over eight years.

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