Petrobras, the Brazilian energy company, has identified two alternatives to provide potable water to offshore platforms—purchase and operate the equipment, or contract long term with Manal and Associates, an international oilfield service corporation. For the estimates shown, use capitalized cost analysis at i = 6% per year to determine (a) the better economic choice for Petrobras, and (b) the maximum annual M&O cost that will cause Manal and Associates to succeed in winning the contract. Alternative Purchase Contract First cost, $ −300,000 −850,000 M&O, $ per year −10,000, year 1 + 2% increase each year thereafter −10,000 Salvage value, $ 70,000 — Expected use, years 8 40+

Question

Petrobras, the Brazilian energy company, has identified
two alternatives to provide potable water to
offshore platforms—purchase and operate the
equipment, or contract long term with Manal and
Associates, an international oilfield service corporation.
For the estimates shown, use capitalized
cost analysis at i = 6% per year to determine (a) the
better economic choice for Petrobras, and (b) the
maximum annual M&O cost that will cause Manal
and Associates to succeed in winning the contract.
Alternative Purchase Contract
First cost, $ −300,000 −850,000
M&O, $ per year −10,000, year 1
+ 2% increase each
year thereafter
−10,000
Salvage value, $ 70,000 —
Expected use, years 8 40+

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