The Townof Sustainability is planning to rehabilitate the fountain of youth. The

Question

The Townof Sustainability is planning to rehabilitate the fountain of youth. The fountain has a pump that needs to be replaced or refurbished.

Option A:

Replace the pump with a new pump at a cost of $14,500. In years 7 and 14 the pump needs maintenance at a cost of $2,300 each occurrence. The interest rate is

3%. The life of the new pump is 15 years and there is no salvage value at the end of 15 year life

Option B:

Maintain the existing pump based on the following schedule:

Year 1: $6,500

Year 3: $400

Year 5: $500

Year 8: $900

Year 12: $1,200

Year 15: $1,400

The interest rate is 3%and there is no salvage value at the end of 15 year life Based on life cycle cost analysis, what option do you recommend?

Explanation / Answer

if we followed option A, the costs are:

14,500 with interest of 3%, and life of 15 years

it becomes= 14500*1.469= $21300.5, maintanance cost in year 7 is $2300*1.230= 2829, and the maintanace cost on year 14 is $2300*1.03= 2369

the total cost under opton A is= 21300.5+2829+2369= $26489.5

under option B= the investments are

total cost= 9548.5+507.2+672+1107+1311.6+1400= $14,546.3

hence option B carries less cost than option A. so, B is advisable.

1 3 5 8 12 15 6500*1.469 400*1.268 500*1.344 900*1.23 1200*1.093 1400*1 9548.5 507.2 672 1107 1311.6 1400

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