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Oklahoma Electric Company - Equivalent Annual Cost

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The Oklahoma Electric Company (OEC) is currently evaluating two different options to control the emissions from their coal-burning electric generation facility in Dewar. A filtration system will cost $12 million to install and $700,000 per year to operate. The filtration system, which will have a salvage value of zero at the end of its useful life, must be replaced every five years. The alternative is to install a precipitation system that scrubs the air coming from the facility. The precipitation system, which will cost $20 million to install and $200,000 per year to operate, has a useful life of eight years. OEC has a corporate tax rate of 40 percent and an opportunity cost of capital of 10 percent. Assuming that each pollution control system must be depreciated to a zero salvage value over its useful life using straight-line depreciation, determine whether
OEC should purchase the filtration system or the precipitation system

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Solution Preview

The Oklahoma Electric Company (OEC) is currently evaluating two different options to control the emissions from their coal-burning electric generation facility in Dewar. A filtration system will cost $12 million to install and $700,000 per year to operate. The filtration system, which will have a salvage value of zero at the end of its useful life, must be replaced every five years. The alternative is to install a precipitation system that scrubs the air coming from the facility. The precipitation system, which will cost $20 million to install and $200,000 per year to operate, has a useful life of eight years. OEC has a corporate tax rate of 40 percent and an opportunity cost of capital of 10 percent. Assuming that each pollution control system must be depreciated to a zero salvage value over its useful life using straight-line depreciation, determine whether OEC should purchase the ...

Solution Summary

The solution evaluates two options by comparing Equivalent Annual Cost.

$2.19