Consider buying a backup pump to reduce downtime by replacing our current pumps

Question

Consider buying a backup pump to reduce downtime by replacing our current pumps whenever they need repaired. The new pump will cost $15,000 and is expected to last 4 years. Each year it will prevent us from losing $6,000 of revenue due to downtime. The new pump will have a salvage value of $1,000 1. What is the time horizon for this investment analysis? a. Not enough information. b. The least common multiple of the 4-year life of the new pump and the life expectancy of the existing pumps c. 4 years d. 5 years

Explanation / Answer

Time horizon also sometimes known as planning horizon is a fixed time in future when certain process, investment of asset will be evaluated or will be assumed to end.

Going by the definition and the given case, the new pumps will be used in case of downtime and are expected to decrease the losses for a period of 4 years since purchase and hence the time horizon is 4 years (option C) as we will monitor its performance for 4 years after which we can see its performance.

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