A pump is needed for 10 years at a remote location. The pump can be driven by an
ID: 1091025 • Letter: A
Question
A pump is needed for 10 years at a remote location. The pump can be driven by an electric motor if a power line is extended to the site. Otherwise, a gasoline engine will be used. Use an annual cash flow analysis and an 8% interest rate. How should the pump be powered?
Gasoline
Electric
First cost
2400
9000
Annual operating cost
1200
250
Annual maintenance
300
50
Salvage value
300
600
Life, in years
5
10
Electric
Gasoline
Neither is acceptable
Either one will do
Gasoline
Electric
First cost
2400
9000
Annual operating cost
1200
250
Annual maintenance
300
50
Salvage value
300
600
Life, in years
5
10
Explanation / Answer
for Gasoline,
Initial cost = 2400
salvage cost = -$300
Life = 5 years
Annual operating+maintainance cost = 1200+300 = $1500
Present value of total cash flow
= 2400+(1500/1.08^1)+(1500/1.08^2)+(1500/1.08^3)+(1500/1.08^4)+(1500/1.08^5)-(300/1.08^5)
= $8184.89
Effective annual cost = 8184.89/PVIFA(8,5) = 8184.89/3.9927 = $2049.96
for Electirc,
Initial cost = 9000
salvage cost = -$600
Life = 10 years
Annual operating+maintainance cost = 250+50 = $300
Present value of total cash flow
= 9000+(250/1.08^1)+(250/1.08^2)+(250/1.08^3)+(250/1.08^4)+(250/1.08^5)-(600/1.08^5)
= 9589.82
Effective annual cost = 9589.82/PVIFA(8,10) = 9589.82/6.7101 = $1429.16
The effective annual cost of Electric is less so we should choose ELectirc
Electirc (Option A)
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