A plastic-manufacturing company owns and operates a polypropylene production facility that converts the propylene from one of

Question:

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 of the pipeline: 8% of the installed costs.
Determine the propylene cost per pound under each option if the firm's is 18%. Which option is more economical?
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