An environmental consultant is considering the installation of a water storage tank for a client. The tank is estimated to have an initial cost of $309,000, and annual maintenance costs are estimated to be $7,100 per year. As an alternative, a holding pond can be provided a short distance away at an initial cost of $225,000 for the pond plus $90,000 for pumps and piping. Annual operating and maintenance costs for the pumps and holding pond are estimated to be $16,000. The planning horizon is 20 years, and at that time, neither alternative has any salvage value. Required:
Determine the preferred alternative based on a present worth analysis with a MARR of 20 percent/year.

The preferred alternative based on a present worth analysis with a MARR of 20% per year is:

the Installation of a water Storage Tank

Explanation:

a) Data and Calculations:

MARR = 20% per year

Time period or planning horizon = 20 years

                                                   Alternatives

                                               Tank              Pond

Initial costs                           $309,000      $315,000 ($225,000 + $90,000)

Annual maintenance costs         7,100          16,000

PV annuity factor                        4.870            4.870

Total PV: maintenance cost  $34,577        $77,920 ($16,000 * 4.870)

Total PW costs                     $343,577      $392,920 ($315,000 + $77,920)

Present worth is the same as the present value (PV) of a future amount, discounted to the present using a specified rate.

in 2001, dell computer became the world’s largest personal computer vendor, continuing to

gain market share and post profits in an industry struggling with slumping sales and billions of

dollars in losses. dell sells 90% of its pcs directly to the final customer, largely bypassing the

reseller channel that accounts for most of the world’s pc sales. this direct customer relationship

is the key to dell’s business model, and provides distinct advantages over the indirect sales

model. dell’s direct relationship with the customer allows it to tailor its offerings to customer

needs, offer add-on products and services, and use the internet to offer a variety of customer

services. in addition, dell’s pcs are built to customers’ specifications upon receipt of an order,

giving dell additional advantages over indirect pc vendors who must try to forecast demand and

ship products based on those forecasts. dell’s direct sales and build-to-order model has achieved

superior performance in the pc industry in terms of inventory turnover, reduced overhead, cash

conversion, and return on investment (kraemer, et al., 2000).

explanation:

answerattainable;