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(=[latex]SV_{5} [/latex])	$5,000(=[latex]SV_{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 [latex]40 \%[/latex] and a MARR after-taxes of [latex]12 \%[/latex] per year. Which pipe fitting would you select and why? Carefully list all assumptions that you make in performing the analysis. [latex](7.9,7.10)[/latex]

Accepted Answer

Assume repeatability.

Alternative A: Plastic

[latex]d=(\$ 5,000-\$ 1,000) / 5=\$ 800[/latex]

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

[latex]\operatorname{AW}_{\mathrm{A}}(12 \%)=-\$ 5,000(A / P, 12 \%, 5)+\$ 140+\$ 400(A / F, 12 \%, 5)=-\$ 1,184[/latex]

Alternative B: Copper

[latex]d=(\$ 10,000-\$ 5,000) / 10=\$ 500[/latex]

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

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

Select Alternative A: Plastic.

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

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