A plastic-manufacturing company owns and operates a polypropylene-production facility that converts the propylene from one of its cracking facilities to polypropylene plastics for outside sale. The polypropylene-production facility is currently forced to operate at less than capacity due to a lack of propylene-production capacity in its hydrocarbon-cracking facility. The chemical engineers are considering alternatives for supplying additional propylene to the polypropylene productionfacility. Some of the feasible alternatives are as follows: Option 1: Build a pipeline to the nearest outs.ide supply source.Option 2: Provide additional propylene by truck from an outside source.The engineers also gathered the following projected cost estimates:Hi Future costs for purchased propylene, excluding delivery: $0.215 per lb1. Cost of pipeline construction: $200,000 per pipeline mile2. Estimated length of pipeline: 180 miles3. Transportation costs by tank truck: $0.05 per lb, using a common carrier4. Pipeline operating costs: $0.005 per lb, excluding capital costs Oil Projected additional propylene needs: 180 million lbs per year5. Projected project life: 20 years6. Estimated salvage value of the pipeline: 8% of the installed costsDetermine the propylene cost per pound under each option if the firm's MARR is 18%. Which option is more economical?
A plastic-manufacturing company owns and operates a polypropylene-production facility that converts the propylene from one of its cracking facilities to polypropylene plastics for outside sale. The polypropylene-production facility is currently forced to operate at less than capacity due to a lack of propylene-production capacity in its hydrocarbon-cracking facility. The chemical engineers are considering alternatives for supplying additional propylene to the polypropylene production
facility. Some of the feasible alternatives are as follows:
Option 1: Build a pipeline to the nearest outs.ide supply source.
Option 2: Provide additional propylene by truck from an outside source.
The engineers also gathered the following projected cost estimates:
Hi Future costs for purchased propylene, excluding delivery: $0.215 per lb
1. Cost of pipeline construction: $200,000 per pipeline mile
2. Estimated length of pipeline: 180 miles
3. Transportation costs by tank truck: $0.05 per lb, using a common carrier
4. Pipeline operating costs: $0.005 per lb, excluding capital costs Oil Projected additional propylene needs: 180 million lbs per year
5. Projected project life: 20 years
6. Estimated salvage value of the pipeline: 8% of the installed costs
Determine the propylene cost per pound under each option if the firm's MARR is 18%. Which option is more economical?
The question is based on the decision making between procuring the material required from outside sources or constructing the facility for in-house production of the same.
In Option1- Build a pipeline to the nearest outside supply source, calculation of cost of material per pound is done by first calculating the total cost of the project by taking the sum of initial investment and the present value of operating costs per annum along with the present value of salvage recovered at the end of life of the project. The total cost then is divided by the total quantity of production over 20 years.
It is shown as follows-
It will give us the following output-
Therefore, per pound production cost is $0.011 in option 1.
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