The state is considering three proposals for increasing the capacity of the main drainage canal in an agricultural region. Proposal A requires dredging the canal. The state is planning to purchase the dredging equipment and accessories for $650,000. The equipment is expected to have a 10-year life with a $17,000 salvage value. The annual operating costs are estimated to total $50,000. To control weeds in the canal itself and along the banks, environmentally safe her- bicides will be sprayed during the irrigation season. The yearly cost of the weed control program is expected to be $120,000. Proposal B is to line the canal walls with concrete at an initial cost of $4 million. The lining is assumed to be permanent, but minor maintenance will be required every year at a cost of $5000. In addition, lining repairs will have to be made every 5 years at a cost of $30,000. Proposal C is to construct a new pipeline along a different route. Estimates are: an initial cost of $6 million, annual maintenance of $3000 for right-of-way, and a life of 50 years. Compare the alternatives on the basis of annual worth, using an interest rate of 5% per year.

The state is considering three proposals for increasing the capacity of the main drainage canal in an agricultural region. Proposal A requires dredging the canal. The state is planning to purchase the dredging equipment and accessories for $650,000. The equipment is expected to have a 10-year life with a $17,000 salvage value. The annual operating costs are estimated to total $50,000. To control weeds in the canal itself and along the banks, environmentally safe her- bicides will be sprayed during the irrigation season. The yearly cost of the weed control program is expected to be $120,000. Proposal B is to line the canal walls with concrete at an initial cost of $4 million. The lining is assumed to be permanent, but minor maintenance will be required every year at a cost of $5000. In addition, lining repairs will have to be made every 5 years at a cost of $30,000. Proposal C is to construct a new pipeline along a different route. Estimates are: an initial cost of $6 million, annual maintenance of $3000 for right-of-way, and a life of 50 years. Compare the alternatives on the basis of annual worth, using an interest rate of 5% per year.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 17P

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