Question

An environmental consultant is considering the installation of a water storage tank for a client. The tank is estimated to have an initial cost of $309,000, and annual maintenance costs are estimated to be $7,100 per year. As an alternative, a holding pond can be provided a short distance away at an initial cost of $225,000 for the pond plus $90,000 for pumps and piping. Annual operating and maintenance costs for the pumps and holding pond are estimated to be $16,000. The planning horizon is 20 years, and at that time, neither alternative has any salvage value.

Required:
Determine the preferred alternative based on a present worth analysis with a MARR of 20 percent/year.

Answer 1

The preferred alternative based on a present worth analysis with a MARR of 20% per year is:

the Installation of a water Storage Tank

Step-by-step explanation:

a) Data and Calculations:

MARR = 20% per year

Time period or planning horizon = 20 years

Alternatives

Tank Pond

Initial costs $309,000 $315,000 ($225,000 + $90,000)

Annual maintenance costs 7,100 16,000

PV annuity factor 4.870 4.870

Total PV: maintenance cost $34,577 $77,920 ($16,000 * 4.870)

Total PW costs $343,577 $392,920 ($315,000 + $77,920)

Present worth is the same as the present value (PV) of a future amount, discounted to the present using a specified rate.