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A community has been directed to reduce by 75% the amount of solid and chemical...

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Accounting

A community has been directed to reduce by 75% the amount of solid and chemical waste effluent discharged from its sewage treatment plant into a small river. Three companies have bid on systems to modify the plant. Each system is expected to last for the remaining life of the plant, 15 years. Initial costs and annual increase in plant operation and maintenance costs for each of the three bids are as shown. If Bid A is accepted, certain elements of the system will have to be replaced at 5-year intervals at a cost of $100,000. The contractor offering Bid C guarantees that the proposed system will reduce waste discharged by 90%. Contractors offering Bids A and B guarantee only that their systems will meet or exceed specifications. Assuming an i* of 9%, which bid should be accepted? Is this the system with the lowest initial cost? What is the present worth of the costs of the greater efficiency guaranteed by Bid C? What factors might lead the community to select Bid C?

Bid A Bid B Bid C

Initial cost $500,000 $640,000 $760,000

Annual O&M $60,000 $48,000 $36,800

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