Problem:
An 8 year old storage tank has to be replaced or repaired because of severe corrosion. You have been asked to investigate three alternatives
Replace tank to original specifications.
-Repair tank with stainless steel lining.
-Replace tank with stainless steel tank.
You have obtained the following information: Shut down time allowed 10 days, each day over the 10 day period costs the company $5000 in lost revenue.
Material and fabricating costs for STEEL TANK $50000, Installation cost $20000, Time required for installation is 8 days, life span is 8 years, annual maintenance cost is $2000, salvage value is zero.
Material and fabricating costs for STAINLESS STEEL LINING $35000, Installation cost $30000, Time required for installation is 12 days, life span is 12 years, annual maintenance cost is $1000, salvage value is zero.
Material and fabricating costs for STAINLESS STEEL TANK $75000, Installation cost $25000, Time required for installation is 10 days, life span is 16 years, annual maintenance cost is zero, salvage value is $5000.
For a minimum attractive rate of return of 12%, which is the most economical alternative?
(Use equivalent annual cost method)