Q4 Two possible routes for a power line are under study Data

Q4. Two possible routes for a power line are under study. Data on theroutes are as follows: Route Length 5km $25,000/km $400/km 25 $3000/km 15 km Construction Cost Annual Maintenance Useful life Salvage Value P $5000/km $m Ac $200/km 20 If the company MARR is 10% per year, which route shall the company select for the power line? (10 marks)

Solution

Solution:

1st Case Length A is Greater than B.

2nd Case Using MAAR (Minimum Acceptable Rate of return)

PA = -5,000 - 200 (P|A, .10, 20) + 2,500 (P|F, .10, 20)

= -5,000 - 200 (19.485) + 2500 (.9513)

= -5,000 – 3897 + 2378.25

= -6.518.75

PB = -25,000 - 400 (P|A, .10, 25) + 3,000 (P|F, .10, 25)

= -25,000 – 400 (24.206) + 3000 (0.9395)

= -25000 - 9682.4 +2818.5

= -31,863.9

Route A > Route B

SELECT ROUTE A