Question

A chemical process in your plant leaves scale deposits on the inside of the pipes. The scale cannot be removed, but increasing the pumping pressuremaintains flow through the narrower diameter. The pipe costs $35 per foot to install, and it hasno value when it is removed. The pumping costs are $8 per foot of pipe initially, and the increaseannually by $7.50 peryear starting in Year 2. What is the economic life of the pipe if the interest rate is 12%.

Answer 1

Answer and solution:

We have to find a minimum EUAC for the pipe.

EUAC for 1 yr = 35 * (A/P,12%,1) + 8

= 35*1.12 + 8

= 47.20

EUAC for 2 yr = 35 * (A/P,12%,2) + 8 + 7.5 * (A/G,12%,2)

= 35 * 0.59170 + 8 + 7.5 *0.471698

= 32.25

EUAC for 3 yr = 35 * (A/P,12%,3) + 8 + 7.5 * (A/G,12%,3)

= 35 * 0.41635 + 8 + 7.5 *0.924609

= 29.51

EUAC for 4 yr = 35 * (A/P,12%,4) + 8 + 7.5 * (A/G,12%,4)

= 35 * 0.32923 + 8 + 7.5 *1.358852

= 29.71

EUAC for 5 yr = 35 * (A/P,12%,5) + 8 + 7.5 * (A/G,12%,5)

= 35 * 0.27741 + 8 + 7.5 *1.774595

= 31.02

As EUAC has started increasing, it will keep on increasing if the years of operation is increased

Minimum EUAC = 29.51 in year 3

So Economic life = 3 yrs