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Activety A

The document discusses two plans for a power company to distribute $60 million from a lawsuit settlement over time. Plan A involves spending $5 million now and $5.5 million each year for 10 years. Plan B requires spending $5 million now, $25 million in 2 years, and $30 million in 7 years. Using a 10% interest rate, the present value of each plan is calculated. Plan A has a lower present value so it is more economical for the company.

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mohammad alali
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23 views3 pages

Activety A

The document discusses two plans for a power company to distribute $60 million from a lawsuit settlement over time. Plan A involves spending $5 million now and $5.5 million each year for 10 years. Plan B requires spending $5 million now, $25 million in 2 years, and $30 million in 7 years. Using a 10% interest rate, the present value of each plan is calculated. Plan A has a lower present value so it is more economical for the company.

Uploaded by

mohammad alali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Zarqa University Faculty of Engineering Technology

Mechanical Engineering Department

◉ Course Name: Maintenance Management

◉ Project Name: Economics Engineering

◉ Activity Number: Activity 6


◉ Instructor Name: Mohammad Qabaja
◉ Student Name: Mohammad Al-Ali

◉ University NO: 20203028


◉ Date: 3/12/2023
Midwest Power and Light operates 14 coal-fi red power plants in several states
around the United States. The company recently settled a lawsuit by agreeing to
pay $60 million in mitigation costs related to acid rain. The settlement included
$21 million to reduce emissions from barges and trucks in the Ohio River
Valley, $24 million for projects to conserve energy and produce alternative
energy, $3 million for Chesapeake Bay, $2 million for Shenandoah National
Park, and $10 million to acquire ecologically sensitive lands in Appalachia. The
question of how to distribute the money over time has been posed. Plan A
involves spending $5 million now and the remaining $55 million equally over a
10-year period (that is, $5.5 million in each of years 1 through 10). Plan B
requires expenditures of $5 million now, $25 million 2 years from now, and
$30 million 7 years from now. Determine which plan is more economical on
the basis of a present worth analysis over a 10-year period at an interest rate of
10% per year.

Solution:

Plan A = spending $5 million now then $5.5 million at the top of every year
trough years 1 to 10.

The present value of the $5 million being spent now $5 million (as it is in the
current point in time).

Present value of $5.5 million spend at the end of each year through years 1 to
10

Will be determined using the formula:

P = A (P / A, i, n) where A= $5.5 million, i = 10% and n = 10 years.

Using the compound interest table to determine the present worth factor, the
factor for 10% and 10 years = 6.145

Thus, present value of $5.5 million spend at the end of each year through years
1 to 10 = A* present worth factor

= $5.5 million*6.145 = $33.7975 million.

Total PV= $5 million+ $33.7975 million= $38.7975 million


Plan B: Present value of $5 million now = $5 million

Present value of $25 million paid 2 years from now = F(P/F , i , n ) where F =
$25 million, i =10% and n=2.

The present worth factor =0.8264. Thus present value of $25


million=25*0.8264 = $20.66 million.

Present value of $30 million paid 7 years from now = F(P/F , i , n ) where
F=$30 million, i =10% and n=7.

The present factor 0.5132

Thus present value =30*0.5132=$15.396 million

Total= $5 million+ $20.66 million+ $15.396 million= $41.056 million.

As the present value of Plan A is lower, it is more economical.

This is because, in present value terms, the power company is paying a lower
amount of money in Plan A.

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