An electric company must decide between two options for managing the blowdown water from its cooling tower. Option 1 is to continue the lease on 50 acres of land for another 5-year period and dispose...

An electric company must decide between two options

for managing the blowdown water from its

cooling tower. Option 1 is to continue the lease on

50 acres of land for another 5-year period and dispose

of the water by spray irrigation. The landowner

will move the pipe around as necessary and

maintain the spray nozzles and valves. The previous

lease cost $125,000 per year with payments

due midway through each year. Now the landowner

will require beginning of year payments of

$180,000 each year.

Option 2, which releases the 50 acre tract of

land, involves purchasing a treatment system that

will allow the recycling of most of the blowdown

water. This system will have an initial cost of

$1,600,000 and an AOC of $58,000 per year. However,

the company will save $220,000 per year because

it will not have to purchase as much make-up

water as with option 1. At the end of 5 years, the

company will be able to sell the equipment back to

the local equipment supplier for 30% of the first

cost.

If the electric company uses a MARR of 15%

per year, should it continue to lease (defender) or

purchase the treatment system (challenger)?