Reference no: EM131909071

A natural gas distribution company is evaluating the economic desirability of replacing or repairing existing gas mains, it is estimated that 100,000 Mcf of gas being lost per year and that this gas could be sold to corporate customers at $8.00 per Mcf. The cost of replacing the gas mains is estimated to be $4,000,000 at time zero. Replacement of the mains would effectively eliminate all as loss for the next 10 years. The cost of repairing the gas mains is estimated to be $1,600,000 which would reduce annual gas loss to 25,000 Mcf at year one (allocated to the end of the year), with gas loss increasing by a constant gradient of 6,000 Mcf per year in years following year one. Use net present value analysis for a 10-year evaluation life and id=15.0% to determine from an economic viewpoint if the gas mains should be replaced, repaired, or left in the present condition.