Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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A plastic-manufacturing company owns and
operates a polypropylene production facility that converts the propylene from one of its cracking facilities
to polypropylene plastics for outside sale. The polypropylene production facility is currently forced to
operate at less than capacity due to an insufficiency
of propylene production capacity in its hydrocarbon
cracking facility. The chemical engineers are considering alternatives for supplying additional propylene
to the polypropylene production facility. Two feasible
alternatives are to build a pipeline to the nearest outside supply source and to provide additional propylene by truck from an outside source. The engineers
also gathered the following projected cost estimates.
• Future costs for purchased propylene excluding
delivery: $0.215 per lb.
• Cost of pipeline construction: $200,000 per pipeline mile.
• Estimated length of pipeline: 180 miles.
• Transportation costs by tank truck: $0.05 per lb,
utilizing a common carrier.
• Pipeline operating costs: $0.005 per lb, excluding
capital costs.
• Projected additional propylene needs: 180 million
lb per year.
• Projected project life: 20 years.
• Estimated salvage value of the pipeline: 8% of the
installed costs.
Determine the propylene cost per pound under each
option if the firm’s MARR is 18%. Which option is
more economical?
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