Question

A steam boiler is needed as part of the design of a new plant. The boiler can be fired by natural gas, fuel oil, or coal. A cost analysis shows that natural gas would be the cheapest at $30,000; for fuel oil it would be $55,000; and for coal it would be $180,000. If natural gas is used rather than fuel oil, the annual fuel cost will decrease by $7,500. If coal is used rather than fuel oil, the annual fuel cost will be $15,000 per year less. Assuming 8% interest, a 20-year analysis period, and no salvage value, which is the most economincal installation?

Answer 1

Answer:

Natural gas boiler

Explanation:

Alternative                 Installation cost                  Annual savings

natural gas                 $30,000                              $7,500

fuel oil                        $55,000                               not given

coal                            $180,000                             $15,000

we need to find the PV of natural gas savings = $7,500 * 9.8181 (PVIFA, 8%, 20 periods) = $73,638

the PV of coal savings = $15,000 - 9.8181 (PVIFA, 8%, 20 periods) = $147,272

NPV of natural gas boiler = $73,638 - $30,000 = $43,638

NPV of coal boiler = $147,272 - $180,000 = -$32,728