PROBLEM SET NO. 2 ES 321 5.

A food processing plant consumed 600,000 kwh of electric energy annually and pays an average of P2.00 per kwh. A study is being made to generate its own power to supply the plant energy required, and that the power plant installed would cost P2,000,000. Annual operation and maintenance, P 800,000. Other expense, P 100,000 per year. Life of the plant is 15 years, salvage value at the end of life is P 200,000; annual taxes and insurance, 6% of the first cost; and rate of interest is 15%. Using the sinking fund method for depreciation, determine if the power plant is justifiable. Using Annual Worth Method:

AW ( i%) ! R  E  CR( i%) R = annual equivalent revenues or savings

E = annual equivalent expense CR = annual equivalent capital recovery

R ! 600 ,000 kwhP 2.00 kwh ! P1,200 ,000.00

CR=Annual equiv. of the initial capital investment annual equiv. of the salvage value

0.15 0.15 CR ! 2 ,000 ,000  200 ,000 15 ( 1  0.15 )15  1 1  ( 1  0.15 ) CR ! 342 ,034.11  4 ,203.41 ! 337 ,830.70 E ! 800 ,000  100 ,000  ( 0.06 )( 2 ,000 ,000 ) ! 1,020 ,000 AW ! 1,200 ,000.00  1,020 ,000  337 ,830.70 AW ! 157 ,830.70 1  ( 1  0.15 )15 PW ! 157 ,830.70 ! 992 ,894.52 0.15
Negative annual worth tells that energy expense is greater on availing a power plant in a 15-year period, therefore, opting to power plant is not justifiable.

To check: Using Present Worth Method: No power plant Annual Expenses: Annual energy consumption = 600 ,000 kwh P 2.00 kwh ! P1,200 ,000.00

1  ( 1  0.15 )15 Present worth = 1,200 ,000 ! 7 ,016 ,844.12 0.15

With power plant Expenses: Present worth total net expense =

1  ( 1  0.15 )15 15 2 ,000 ,000  ? 800 ,000  100 ,000  120 ,000 A  ( 200 ,000 )( 1  0.15 ) 0.15 Present worth total net expense = P7 ,939 ,738.60
Difference = 7 ,016 ,844.12  7 ,939 ,738.60 ! 922 ,894.48 Consistent with the annual worth method

Energy expense is greater on availing a power plant, therefore, opting to power plant is not justifiable.