Contemporary Engineering Economics 6th Edition by Chan Park

Exercise 31

A utility company is in the process of considering two alternative methods of providing transformer capacity.
• Option 1: Purchase a 16 MVA transformer now and add a similar-sized unit at a later date when load growth is warranted. The price of a 16 MVA unit is $680,000.
• Option 2: Purchase a 25 MVA transformer at the outset which will meet the future load growth for at least the next 10 years. The price of a 25 MVA unit is $920,000.
Technical specs for the transformers are as given in Table.
TABLE 2
Suppose the expected load growth over the next 20 years is 11 MVA during the first year and 1 MVA each following year over the previous year. Each transformer has a useful life of 20 years. Which transformer unit would be selected using an interest rate of 8% with the study period of 10 years How about with 20 years Assume the future replacement cost would be the same as the intial purchase price.