Page 310 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

Both pieces of equipment have service lives of 12 years. For an internal rate of return of 8% p.a., which
piece of equipment represents the better choice?

The NPV for each exchanger is evaluated below.

NPV = –Initial Investment + (Operating Cost)(P/A, 0.08, 12)

The air-cooled exchanger represents the better choice.

Despite the higher capital investment for the air-cooled exchanger in Example 10.6, it was the
recommended alternative. The lower operating cost more than compensated for the higher initial

investment.

10.5.2 Equipment with Different Expected Operating Lives

When process units have different expected operating lives, we must be careful how the best choice is
determined. When we talk about expected equipment life, it is assumed that this is less than the expected

working life of the plant. Therefore, during the normal operating life of the plant, we can expect to replace
the equipment at least once. This requires that different profitability criteria be applied. Three commonly
used methods are presented to evaluate this situation. (The effect of inflation is not considered in these
methods.) All methods consider both the capital and operating cost in minimizing expenses, thereby
maximizing our profits.

Capitalized Cost Method. In this method, a fund is established for each piece of equipment that we
wish to compare. This fund provides the amount of cash that would be needed to
a. Purchase the equipment initially
b. Replace it at the end of its life
c. Continue replacing it forever

The size of the initial fund and the logic behind the capitalized cost method are illustrated in Figure 10.4.

Figure 10.4 An Illustration of the Capitalized Cost Method for the Analysis of Equipment Alternatives