The Jasper County Waste Water Board has asked for your assistance in the following problem. They are considering two new methane digesters and need your input on which machine they should select. Project TEX is a similar to a machine they have used in the past that is manufactured in Texas. Since they are so familiar with the technology they consider this method to have little to no risk. Project NZ is a new technology from New Zealand. Due to some uncertainty with the adaptability of this process that was originally developed for an agricultural application, the JCWWB has asked you to use a risk adjusted technique. You have decided to use the RADR technique and will increase/decrease the discount 3 percent for projects with other than average risk. The county uses a 10% cost for average risk projects. Also, the Texas project will last 4 years and the NZ project has a life of only 3 years and the process is one that will need to be continued on in the future. Assume inflation effects are neutral and can be ignored. Which project would you recommend and why? The cashflows are all beginning of year cashflows.
Proj TEX PROJ NZ
Yr 1 ($240,000) ($190,000)
Yr 2 ($140,000) ($170,000)
Yr 3 ($140,000) ($165,000)
Yr 4 ($140,000)