An oil refinery must now begin sending its waste liquids through a costly treatment process before discharging them. The engineering department estimates costs at $450,000 for the first year. It is estimated that if process and plant alterations are made, the waste treatment cost will decline $43,000 each year. As an alternate, a specialized firm, Hydro-Clean, has offered a contract to process the waste liquids for 15 years for $225,000 per year. Either way, there should be no need for waste treatment after 15 years. Use an 10% interest rate and annual cash flow analysis. what is the Hydro-Clean offer that should be accepted?

Question

Business

Reeve

21 May, 23:15

An oil refinery must now begin sending its waste liquids through a costly treatment process before discharging them. The engineering department estimates costs at $450,000 for the first year. It is estimated that if process and plant alterations are made, the waste treatment cost will decline $43,000 each year. As an alternate, a specialized firm, Hydro-Clean, has offered a contract to process the waste liquids for 15 years for $225,000 per year. Either way, there should be no need for waste treatment after 15 years. Use an 10% interest rate and annual cash flow analysis. what is the Hydro-Clean offer that should be accepted?

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Answers (1)

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Darien Cole · Answer 1

Option A is the cheapest.

Explanation:

Giving the following information:

The engineering department estimates costs of $450,000 for the first year. It is estimated that if process and plant alterations are made, the waste treatment cost will decline $43,000 each year. As an alternative, a specialized firm, Hydro-Clean, has offered a contract to process the waste liquids for 15 years for $225,000 per year.

We need to use the following formula and chose the smallest net present value:

NPV = Io + ∑ [Cf / (1+i) ^n]

Option A:

Io = 407,000

Year cost = 43,000

NPV = 734,061

Option B:

Yearly cost = 225,000

NPV = 1,936,368