determine whether OEP should purchase the wet flue system or the precipitation system.

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5. Osage Electric Power (OEP) is evaluating two alternative technologies for controlling the emissions from their coal-burning power plant in the Wyandotte Valley. A wet flue desulfurization system will cost $72 million to install and $3,600,000 per year to operate. The wet flue system must be replaced every five years and will have zero salvage value at the end of its useful life. Alternatively, OEP can install a standard precipitation system to scrub the air coming from the facility. The precipitation system will cost $96 million to install and $1,000,000 per year to operate. The precipitation system has a useful life of eight years with a zero salvage value at the end of its useful life. OEP has a corporate tax rate of 25 percent and a required return of 10.0 percent. Both pollution control systems are capable of reducing emissions below the expanded limit on particulate matter required by the EPA. Assuming that the Internal Revenue Service allows pollution control systems to be depreciated to a zero salvage value over a four-year life using straight-line depreciation and that the costs of replacing pollution control equipment are expected to remain constant, determine whether OEP should purchase the wet flue system or the precipitation system. (20 points)

 

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