An oil refinery must now begin sending its waste liquids through a costly treatment process before discharging them. The engineering department estimates costs at $450,000 for the first year. It is estimated that if process and plant alterations are made, the waste treatment cost will decline $43,000 each year. As an alternate, a specialized firm, Hydro-Clean, has offered a contract to process the waste liquids for 15 years for $225,000 per year. Either way, there should be no need for waste treatment after 15 years. Use an 10% interest rate and annual cash flow analysis. what is the Hydro-Clean offer that should be accepted?

The engineering department estimates costs of $450,000 for the first year. It is estimated that if process and plant alterations are made, the waste treatment cost will decline $43,000 each year. As an alternative, a specialized firm, Hydro-Clean, has offered a contract to process the waste liquids for 15 years for $225,000 per year.

We need to use the following formula and chose the smallest net present value:

NPV= Io +∑ [Cf/(1+i)^n]

Option A:

Io= 407,000

Year cost= 43,000

NPV= 734,061

Option B:

Yearly cost= 225,000

NPV= 1,936,368