1. 2. An oil refinery has to replace approximately 795,000 m of pipe. Three alternative types of
pipe are being considered: If the established discount rate is 8%, compounded annually, and the
salvage value at the end of the useful life for each type of pipe is 20% of the initial cost,
determine the most attractive alternative.
Solution
Annual equivalent cost is lowest for Iron Pipe and it should be chosen
Initial
cost
Annual
O&M
Installation
cost
Salvage
value
Net present
value of cost
Annual
equilvalent
cost
Iron Pipe 7 2385000 3975 105000 477000 2789020.24 535693.8
Iron Alloy Pipe 10 3975000 3180 105000 795000 4469576.882 666098.8
Chrome Iron Alloy Pipe 15 4770000 2385 105000 954000 5196154.943 607064.4