Economics

Section 5Dr.Hoda’s part

Alternative investmentSheet 6

Eng. Reda Zein

It is the ability of choose between alternatives. The more expensive alternative should give

savings to be better than the cheapest.

Where: ROII is the return on incremental investment.

Alternative investments

As ROII or ROI (return on investment) increases, the pay

back time decreases.

Note that:

To be able to compare between alternatives you have to :

1- Make sure that all alternatives give the same function.

2- Begin with the cheapest one.

Alternative investments

I f the more expensive alternative does not give any

saving so no need to compare. ROII ranges from 5 to 30 % and the typical value is 15

%.

Alternative investments

Let’s begin our final sheet :D

2) A heat exchanger has been designed and insulation is

being considered for the unit. The insulation can be

obtained in thickness of 1, 2, 3 or 4 inch. The following

data have been determined for the different insulation

thickness:

What thickness of insulation should be used? The value of

heat is 30 cents/10^6 Btu. An annual return of 15% on

the fixed-capital investment is required for any capital put

into this type of investment. The exchanger operates 300

days per year(Ans.: 2” is accepted)

1” 2” 3” 4”

BTU/hr saved 300,000 350,000 370,000 380,000

Cost of installed insulation, $

1,200 1,600 1,800 1,870

Annual fixed charges, % 10 10 10 10

4) A chemical company is considering replacing

reactor with a modernized continuous reactor.

The old unit cost $40,000 when new 5 years ago,

and depreciation have been charged on a straight

line basis using an estimated service life of 15

years and final salvage value of $1,000. It is now

estimated that the unit has a remaining service

life of 10years and a final salvage value of

$1,000. The new unit would cost now $70,000

and would result on an increase of $5,000 in the

gross annual income. It would permit a labor

savings of $7,000 per year.

Additional costs for taxes and insurance would be

$1,000 per year. The service life is estimated to

be 12 years with a final salvage value of $1,000.

All costs other than those for labor, insurance,

taxes and depreciation may be assumed to be the

same for both units. The old unit can now be sold

for $5,000. If the minimum required return on

investment is 15%, Should the replacement be

made?

(Ans.: Do not make the replacement )

5) The owner of a small antifreeze plant has a small canning

unit which cost him $5,000 when he purchased it 10 years

ago. The unit has been completely depreciated, but the

owner estimates that it will still give good service for 5 more

years. At the end of 5 years the unit will be worth a junk

value of $100. The owner now has an opportunity to buy a

more efficient canning unit for $6,000 having an estimated

service life of 10years and zero salvage or junk value. The

new unit will reduce annual labor and maintenance costs by

$1,000 and increase annual expenses for taxes and

insurance by $100. All other expenses except depreciation

would be unchanged. I f the old canning unit can be sold for

$6,00, What return on investment would the owner receive if

he decides to make the replacement.(Ans.: ROII=7.4%)

7) A mixer settler extraction train to be built to extract

an aqueous solution of valuable metal. At this point in

the process the metal is valued at 20 cents/Ib. Any

metal not extracted is lost to a tailing pond. From the

information given, specify the optimum economical

extraction stages, and state your reason.

Feed: 10^6 Ib metal/year, equipment life: 5 years .

(Ans.: 4 stages)

Number of stages

2 3 4 5

Capital investment, $ 25,000 35,000 44,000 52,000

Recovery, % 75 95 98 99.5

Annual operating cost (excluding depreciation), $

6,000 8,000 10,000 11,000

Any questions?

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