The plant engineer at a major food processing corporation is evaluating alternatives to supply electricity to the plant for the next 10 years. He is faced with three alternatives. a. Do nothing where he will pay $3 million dollars for electricity purchased from the local utility at the end of the first year and estimates that this cost will increase by $300,000 per year thereafter for the life of the project. b. His other option would be to build his own 4000 kilowatt power plant. He has come up with two options for the power plants (Wood and Oil). The operating costs for each would be $130,000 annually. The specifications for the two alternatives are below:
• WOOD. Installed cost of the power plant is $1200/kilowatt. Energy costs for wood, etc (with the exception of operating costs) are $600,000 the first year, and increasing by 10% each year after for the life of the plant.
• OIL. Installed cost of the power plant is $1000/kilowatt. Energy costs for oil, etc are $1,564,000 for the first year, and increasing by $46,000 each year after for the life of the plant.
If interest is 12%, and the analysis period (useful life) is 10 years, which alternative should the engineer choose? Solve the problem by Equivalent Uniform Annual Cost analysis.