PROBLEM SET NO.

2
ES 321

5. A food processing plant consumed 600,000 kwh of electric energy

annually and pays an average of P2.00 per kwh. A study is being made
to generate its own power to supply the plant energy required, and
that the power plant installed would cost P2,000,000. Annual operation
and maintenance, P 800,000. Other expense, P 100,000 per year. Life
of the plant is 15 years, salvage value at the end of life is P 200,000;
annual taxes and insurance, 6% of the first cost; and rate of interest is
15%. Using the sinking fund method for depreciation, determine if the
power plant is justifiable.

Using Annual Worth Method:

AW ( i%) R E CR( i%)
R = annual equivalent revenues or savings
E = annual equivalent expense
CR = annual equivalent capital recovery

R 600 ,000kwh P 2.00 kwh P1,200 ,000.00

CR=Annual equiv. of the initial capital investment annual equiv. of the

salvage value
0.15 0.15
CR 2 ,000 ,000 15
200 ,000
1 ( 1 0.15 ) ( 1 0.15 ) 1
15

CR 342 ,034.11 4 ,203.41 337 ,830.70

E 800 ,000 100 ,000 ( 0.06 )( 2 ,000 ,000 ) 1,020 ,000
AW 1,200 ,000.00 1,020 ,000 337 ,830.70
AW 157 ,830.70

1 ( 1 0.15 )15
PW 157 ,830.70 992 ,894.52
0.15

Negative annual worth tells that energy expense is greater on

availing a power plant in a 15-year period, therefore, opting to
power plant is not justifiable.

To check:
Using Present Worth Method:

No power plant

1
 Annual Expenses:
Annual energy consumption = 600 ,000 kwh P 2.00 kwh P1,200 ,000.00
1 ( 1 0.15 )15
Present worth = 1,200 ,000
0.15 7 ,016 ,844.12

With power plant
Expenses:
Present worth total net expense =
1 ( 1 0.15 )15
P 2 ,000 ,000 P 800 ,000 P100 ,000 P120 ,000 ( P 200 ,000 )( 1 0.15 )15
0.15
Present worth total net expense = P7 ,939 ,738.60

Difference = 7 ,016 ,844.12 7 ,939 ,738.60 922,894.48

Consistent with the annual worth method

Energy expense is greater on availing a power plant, therefore, opting

to power plant is not justifiable.