A pump is needed for 10 years at a remote location. The pump can be driven by an
ID: 1099955 • 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
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
considering gasoline, present value = 2400 + 300 + 1500/1.08 + 1500/(1.08)^2 +.....+ 1500/(1.08)^5 = 8689.06
the above value is just for five years, total value = 8689.06 + 8689.06/1.08^5 = 14602.69
for electric, present value = 9000 + 600 + 300/1.08 + 300/ 1.08^2 +......+ 300/1.08^10 = 11613.02
as the cost is less for electric, pump should be powered by electricity
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