Pllease show all work Fluid Dynamics Company owns a pump that it is contemplatin
ID: 2777819 • Letter: P
Question
Pllease show all work
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.
Use the opportunity cost approach.
Explanation / Answer
Year
0
1
2
3
4
Annual maintenance of old pump
$ 8000
$ 8000
$ 8000
$ 8000
Annual maintenance of new pump
$ 4500
$ 4500
$ 4500
$ 4500
Savings on maintenance
$ 3500
$ 3500
$ 3500
$ 3500
Trade-in value
-$ 4,000
Cost
-$18000
Salvage Value
$9000
Total Cash flows
-$ 22000
$3500
$3500
$3500
$12500
Discount factor at 10%
1.10
1.10^2 = 1.21
1.10^3 = 1.331
1.10^4 = 1.4641
Discounted flows
-$22000
$3181.82
$2892.56
$2629.60
$8537.67
Present Worth = Total value of the cash flows = -$4758.35
Year
0
1
2
3
4
Annual maintenance of old pump
$ 8000
$ 8000
$ 8000
$ 8000
Annual maintenance of new pump
$ 4500
$ 4500
$ 4500
$ 4500
Savings on maintenance
$ 3500
$ 3500
$ 3500
$ 3500
Trade-in value
-$ 4,000
Cost
-$18000
Salvage Value
$9000
Total Cash flows
-$ 22000
$3500
$3500
$3500
$12500
Discount factor at 10%
1.10
1.10^2 = 1.21
1.10^3 = 1.331
1.10^4 = 1.4641
Discounted flows
-$22000
$3181.82
$2892.56
$2629.60
$8537.67