An electric company must decide between two options for managing the blowdown water from its cooling tower.
Question:
An electric company must decide between two options for managing the blowdown water from its cooling tower. Option 1 is to continue the lease on 50 acres of land for another 5-year period and dispose of the water by spray irrigation. The landowner will move the pipe around as necessary and maintain the spray nozzles and valves. The previous lease cost $125,000 per year with payments due midway through each year. Now the landowner will require beginning of year payments of $180,000 each year. Option 2, which releases the 50 acre tract of land, involves purchasing a treatment system that will allow the recycling of most of the blowdown water. This system will have an initial cost of $1,600,000 and an AOC of $58,000 per year. However, the company will save $220,000 per year because it will not have to purchase as much make-up water as with option 1. At the end of 5 years, the company will be able to sell the equipment back to the local equipment supplier for 30% of the first cost. If the electric company uses a MARR of 15% per year, should it continue to lease (defender) or purchase the treatment system (challenger)?
MARRMinimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...
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