ASSIGNMENT 17.1

QUESTION:

In an environmental upgrade of a minimill making steel bar, it is found that a purchase must be made for a large cyclone dust collector. It is the time of the year for capital budget submissions, so there is no time for quotations from suppliers. The last unit of that type was purchased in 1985 for $35,000. It had a 100ft³/min capacity. The new installation in 2012 will require 1000ft³/min capacity. The cost escalation for this kind of equipment has been about 5 percent per year. For budget purposes, estimate what it will cost to purchase the dust collector.

Answer:

To answer this question, equation below is provided:

C₁ = C₀ (L₁/L₀)^x    (Cost-Size Relationship ~page799)

• C₀= $35,000    
• L₀= 100ft³/min
• L₁= 1000ft³/min         
• C₁= ?

Based on Table 17.4 in the text book, x for dust collector= 0.61. Because of economies of scale, the new unit has 10 times the capacity as the unit purchased in 1985 will not cost 10 times more. However, the purchase cost will have increased because of inflation in the 27 years since it was purchased in 1985. Assuming cost inflation in of 5% per year, the original cost of $35,000 is now equivalent to:
P= F(1+i)n
P=35000(1+0.05)²⁷ 
 = 35000(2.92526) 
 = $130 671.00

Thus, the cost estimation can be calculated as:

C₁ = C₀ (L₁/L₀)^x 
       =130 671.00(1000/100)^0.61 
     = $ 532 327.00