Engineering Economy 7th Edition by Leland Blank ,Anthony Tarquin

Exercise 38

An electric utility is considering two alternatives for satisfying state regulations regarding pollution control for one of its generating stations. This particular station is located at the outskirts of a major U.S. city and a short distance from a large city in a neighboring country. The station is currently producing excess VOCs and oxides of nitrogen. Two plans have been proposed for satisfying the regulators. Plan A involves replacing the burners and switching from fuel oil to natural gas. The cost of the option will be $300,000 initially and an extra $900,000 per year in fuel costs. Plan B involves going to the foreign city and running gas lines to many of the "backyard" brick making sites that now use wood, tires, and other combustible waste materials for firing the bricks. The idea behind plan B is that by reducing the particulate pollution responsible for smog in the neighboring city, there would be greater benefit to U.S. citizens than would be achieved through plan A. The initial cost of plan B will be $1.2 million for installation of the lines. Additionally, the electric company would subsidize the cost of gas for the brick makers to the extent of $200,000 per year. Extra air monitoring associated with this plan will cost an additional $150,000 per year. For a 10 year project period and no salvage value for either plan, which one should be selected on the basis of an annual worth analysis at a real interest rate of 7% per year and an inflation rate of 4% per year