7/22/2019 A Pipeline Engineer Working in Kuwait for the Oil

1/1

A pipeline engineer working in Kuwait for the oilgiant BP wants to perform a present worth analysis onalternative pipeline routings the fi rst predominately

by land and the second primarily undersea. The undersearoute is more expensive initially due to extracorrosion protection and installation costs, but cheapersecurity and maintenance reduces annual costs. Performthe analysis for the engineer at 15% per year.

Land Undersea

Installation cost, $ million 225 350

Pumping, operating, security,$ million per year 22 2

Replacement of deteriorated pipe,$ million each 25 years 30 70-

Expected life, years Infinity Infinity

,PWLand = -215 22(P/A,15%,50) 30(P/F,15%,25)= -215 22(6.6605) 30(0.0304)= $-362.443 ($-362,443,000) 4

PWSea = -350 2(P/A,15%,50) 70(P/F,15%,25)

= -350 2(6.6605) 70(0.0304)

= $-365.449 ($-365,449,000)

Select land route by a PW margin of only $3 million