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Present Value of waste elimination for oil refinery

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1. The EPA has ordered your oil refinery to process its waste liquids before discharging them into the local bay. You estimate that it will cost you $30,000 to satisfy this requirement this year. However by gradually making no cost adjustments in the refining process, you estimate you can reduce waste processing costs by 5% annually over the next 10 years, which is the remaining life-time of the refinery. On the other hand, an outside company has offered to process your waste for you every year for the next ten years at an annual fee of $15,000. If your company uses a 10% discount rate, which is preferred course of action?

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The solution determines the present value of waste elimination for oil refinery.

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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