Show all work when solving. Fluid Dynamics Company owns a pump that it is contem
ID: 1193474 • Letter: S
Question
Show all work when solving.
Fluid Dynamics Company owns a pump that it is contemplating replacing. The old pump has annual operating and maintenance costs of $8,000/year: it can be kept for 4 years more and will have a zero salvage value at that time.
The old pump can be traded in on a new pump. The trade-in value is $4,000. The new pump will cost $18,000 and have a value of $9,000 in 4 years and will have annual operating and maintenance costs of $4,500/year.
Using a MARR of 10%, evaluate the investment alternative based upon the present worth method and a planning horizon of 4 years.
a.
Use the cash flow approach.
a.
Use the cash flow approach.
Explanation / Answer
The present values have been calculated as - Cost / (1 + MARR) ^ number of years.
According to the cashflow approach the new pump has a lower cost.
Old Pump New Pump Year Costs MARR Present Value NPV Year Costs MARR Present Value NPV 0 0 10% $0.00 -$25,358.92 0 -14000 10% -$14,000.00 -$22,117.27 1 -8000 10% -$7,272.73 1 -4500 10% -$4,090.91 2 -8000 10% -$6,611.57 2 -4500 10% -$3,719.01 3 -8000 10% -$6,010.52 3 -4500 10% -$3,380.92 4 -8000 10% -$5,464.11 4 4500 10% $3,073.56