8.4 a firm purchased a pump and motor for $1925 installed. It was later discover

Question

8.4 a firm purchased a pump and motor for $1925 installed. It was later discovered that the pump had been improperly selected for the required head and discharge. As a result, the power bill for operating the pump was $900 for a year. A new pump, suited to the requirements , is available for $2450 installed, with a guaranteed that the power costs will not exceed $500 annually. The original pump and motor can be sold for $375. Assume a 10-year study period with zero salvage value for both pumps at the end of the period. The firm uses a minimum attractive rate of return of 10 percent before taxes. Based on present worth calculations, should the pump be replaced?

Explanation / Answer

Annual Saving from the new Pump =$900-$500 = $400

This $400 will be saved for 10 years & old pump can be sold at $375

so total savings

It is clear that the Present value of savings is more than the cost of new pump i.e $2450 , so new pump should be purchased.

Year Saving PVF PV 0 375 1 375.00 1 400 0.9091 363.64 2 400 0.8264 330.58 3 400 0.7513 300.53 4 400 0.6830 273.21 5 400 0.6209 248.37 6 400 0.5645 225.79 7 400 0.5132 205.26 8 400 0.4665 186.60 9 400 0.4241 169.64 10 400 0.3855 154.22 Present value of savings 2832.83

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.