The city of Peachtree is comparing the following two plans for supplying water to a newly developed subdivision:1 Plan A will manage requirements for the next 15 years; at the end of thatperiod, the initial cost of $1,500,000 will have to be doubled to meet the requirements of subsequent years. The facilities installed in years 0 and15 may be considered permanent; however, certain supporting equipmentwill have to be replaced every 30 years from the installation dates at a costof $200,000. Operating costs are $91,000 a year for the first 15 years and$182,000 thereafter. Beginning in the 21st year, they will increase by $3,000a year.2 Plan B will supply all requirements for water indefinitely into the future,although it will operate at only half capacity for the first 15 years. Annualcosts over this period will be $105,000 and will increase to $155,000 beginning in the 16th year. The initial cost of Plan Bis $1,950,000; the facilities can be considered permanent, although it will be necessary to replace $350,000 of equipment every 30 years after the initial installation.The city will charge the subdivision the use of water calculated on the equivalent annual cost. At an interest rate of 10%, determine the equivalent annual cost for each plan and make a recommendation to the city as to the amount that should be charged to the subdivision.
The city of Peachtree is comparing the following two plans for supplying water to a newly developed subdivision:
1 Plan A will manage requirements for the next 15 years; at the end of that
period, the initial cost of $1,500,000 will have to be doubled to meet the requirements of subsequent years. The facilities installed in years 0 and
15 may be considered permanent; however, certain supporting equipment
will have to be replaced every 30 years from the installation dates at a cost
of $200,000. Operating costs are $91,000 a year for the first 15 years and
$182,000 thereafter. Beginning in the 21st year, they will increase by $3,000
a year.
2 Plan B will supply all requirements for water indefinitely into the future,
although it will operate at only half capacity for the first 15 years. Annual
costs over this period will be $105,000 and will increase to $155,000 beginning in the 16th year. The initial cost of Plan Bis $1,950,000; the facilities can be considered permanent, although it will be necessary to replace $350,000 of equipment every 30 years after the initial installation.
The city will charge the subdivision the use of water calculated on the equivalent annual cost. At an interest rate of 10%, determine the equivalent annual cost for each plan and make a recommendation to the city as to the amount that should be charged to the subdivision.
Step by step
Solved in 2 steps
