In a chlorine-fluxing installation in a large aluminum company, engineers are considering the replacement of existing plastic pipe fittings with more expensive, but longer lived, copper fittings. The following table gives a comparison of the capital investments, lives, salvage values, and so on of

Question

In a chlorine-fluxing installation in a large aluminum company, engineers are considering the replacement of existing plastic pipe fittings with more expensive, but longer lived, copper fittings. The following table gives a comparison of the capital investments, lives, salvage values, and so on of the two mutually exclusive alternatives under consideration:

	Plastic	Copper
Capital investment	$5,000	$10,000
Useful (class) life	5 years	10 years
Salvage value for depreciation purposes	$1,000(= S [latex]V_{5}[/latex])	$5,000(= S[latex]V_{10}[/latex])
Annual expenses	$300	$100
Market value at end of useful life	$0	$0

Depreciation amounts are calculated with the SL method. Assume an income tax rate of 40% and a MARR after-taxes of 12% per year. Which pipe fitting would you select and why? Carefully list all assumptions that you make in performing the analysis. (7.9, 7.10)

Accepted Answer

Assume repeatability.

Alternative A: Plastic

d = ($5,000 − $1,000)/5 = $800

EOY	(A) BTCF	(B) Depr.	(C) = (A) − (B) TI	(D) = −t (C) T (40%)	(E) = (A) + (D) ATCF
0 1–5 5	−$5,000 −$300 0	— $800 —	— −$1,100 −$1,000	— $440 $400	− $5,000 $140 $400

[latex]AW_{A}[/latex] (12%) = −$5,000(A/P, 12%, 5) + $140 + $400(A/F, 12%, 5) = −$1,184

Alternative B: Copper

d = ($10,000 − $5,000)/10 = $500

EOY	(A) BTCF	(B) Depr.	(C) = (A) − (B) TI	(D) = −t (C) T (40%)	(E) = (A) + (D) ATCF
0 1−10 10	−$10,000 −$100 0	— $500 —	— −$600 −$5,000	— $240 $2,000	− $10,000 $140 $2,000

[latex] AW_{B}[/latex] (12%) = −$10,000(A/P, 12%, 10) + $140 + $2,000(A/F, 12%, 5) = −$1,516

Select Alternative A: Plastic.

Question 7.T: In a chlorine-fluxing installation in a large aluminum compa...

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