Show all work when solving. Fluid Dynamics Company owns a pump that it is contem
ID: 2777817 • 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
VALUE OF NEW PUMP
ORIGINAL COST 18000-4000 => 14000
MAINTENANCE COST ( 4500*3.17) => 14265
SALVGE VALUE ( 9000* 0.683) => 6147
TOTAL COST => 34412
EQUATED ANNUAL COST => 34412/3.17
=> 10856
OLD MACHINE
SALVAGE VALUE
SALVAGE VALUE OLSS IN YEAR 1= 4000+10% => 4400 WE WILL RECEIVE ONLY 3000 HENCE DECREASE IN SALVAGE VALUE = 4400-3000 => 1400
SIMULTANEOULSY IN YEAR 2 = 1200 , YEAR 3= 1100 AND YEAR 4 = 1000
HENCE COST OF MACINE IN YEAR 1 = 8000+1400 => $9400
YEAR 2 = 8000+ 1300 = $9300
YEAR 3 = 8000+ 1200 => 9200
YEAR 4 = 8000+ 1000 => 9000
HENCE COST IN PRESENT MACHINE IS LESS AS COMPARED TO NEW MACHINE HENCE PROPOSAL SHOULD NOT BE ACCEPTED.
YEARS AMOUNT 0 4000 1 3000 2 2000 3 1000 4 0