A bulk-water supplier has been awarded by a city to supply their potable water for the next 10 years. The city will pay the supplier $150,000 per year during the 10-year contract. The supplier needs to set-up an additional water purification facilities that will have a first cost of $250,000 with an estimated salvage value of 10% of its first cost after 10 years. The operating cost is difficult to estimate, but company engineers have made optimistie, most likely, and pessimistic estimates. The optimistic estimate is that the operating cost will just be constant at $75,000 per year. The most likely estimate is that it will be $75,000 initially and will increase by $5,000 per year. The pessimistic estimate is that it will be $75,000 initially increasing at a rate of 10% per year. Determine if at which operating scenario the supplier will be able to make the most profit. The before tax MARR is 18% per year.

A bulk-water supplier has been awarded by a city to supply their potable water for the next 10 years. The city will pay the supplier $150,000 per year during the 10-year contract. The supplier needs to set-up an additional water purification facilities that will have a first cost of $250,000 with an estimated salvage value of 10% of its first cost after 10 years. The operating cost is difficult to estimate, but company engineers have made optimistie, most likely, and pessimistic estimates. The optimistic estimate is that the operating cost will just be constant at $75,000 per year. The most likely estimate is that it will be $75,000 initially and will increase by $5,000 per year. The pessimistic estimate is that it will be $75,000 initially increasing at a rate of 10% per year. Determine if at which operating scenario the supplier will be able to make the most profit. The before tax MARR is 18% per year.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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