A water distribution company wants to purchase a new pump. The purchase price of

Question

A water distribution company wants to purchase a new pump. The purchase price of the pump is $278,993. The company will put 12.5% down on the pump at the time of purchase and finance the payment of the remaining balance with a 5 year loan having an APR of 6%. Electrical costs will start at $24,599 and increase each year by $567. The average O&M costs are estimated to be $3800 per year. The pump will have a $28,000 salvage value at the end of the 10 year life of the pump. Prepare an annual cash flow table for the annual cost of ownership of the pump for its 10 year life. This cash flow analysis assumes that the loan for the pump is paid off at the end of 5 years and those payments terminate at that point. All other cash flows continue. Only the loan payments terminate.

Explanation / Answer

Ans. Annual cash flow Table:

0 1 2 3 4 5 6 7 8 9 10 Pump Purchased 34,874 Electricity 24,599 25,166 25,733 26,300 26,867 27,434 28,001 28,568 29,135 29,702 O&M Costs 3,800 3,800 3,800 3,800 3,800 3,800 3,800 3,800 3,800 3,800 Interest on Loan(244,119 x 6%) 14,647 14,647 14,647 14,647 14,647 Loan Repaid 244,119 Salvage Value -28,000 Total Cash Outflow $34,874 $43,046 $43,613 $44,180 $44,747 $289,433 $31,234 $31,801 $32,368 $32,935 $5,502

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