Question

To illustrate, consider the selection of a new water pump. The pump is to operate 800 hours per year. Pump A costs $1,900, has an overall efficiency of 82.54%, and it delivers 11 hp. The other available alternative, pump B, costs $800, has an overall efficiency of 43.86%, and delivers 12.1 hp. Both pumps have a useful life of five years and will be sold at that time. (Remember 1 hp = 0.746 kW.) Pump A will use SL depreciation over five years with an estimated SV of zero. Pump B will use the MACRS depreciation method with a class life of three years. After five years, pump A has an actual market value of $390, and pump B has an actual market value of $220. Using the IRR method on the after-tax cash flows and a before-tax MARR of 15%, is the incremental investment in pump A economically justifiable? The effective income tax rate is 22%. The cost of electricity is $0.06/kWh, and the pumps are subject to a study period of five years. The IRR of the incremental investment is 13 %. (Round to one decimal place.)

Answer 1

AN Pump A Pump B Pump A Pump B 300 15% 2296 0.05 Year 2 Year 3 Year 4 Year 5 Year 1 Year 2 Year 3 Year 4 3 No. of Hours per year 4 Before Tax MARR 5 Tax Rate 6 Electricity Cost per kw Year 5 Yearl -1,900.00 5,418.59 -800.00 3.167.25 5.418.59 5.418.59 5.418.59 5.418.59 3.167 25 3.157.25 3.167.25 3.167.25 Outlay Electricity Generated Cost of Electricity Saved Post Tax Outlay Electricity Generated Cost of Electricity Saved Post Tax 7 Study Period 15 years 253.59 253.59 253.59 253.59 253.59 148.23 148.23 148.23 148.23 148.23 9 Icost 10 Efficiency 11 Delivery 1900 8001 82.54% 43.85% ii| 12:11 .20519.02661 Depreciation Tax Saving on Depreciat 380.00 83.60 380.00 83.60 | 380.00 83.60 380.00 83.60 380.00 83.50 Depreciation Tax Saving on Depreciatid 265.54 58.66 | 355.60 58.65 118.48 58.56 59.28 58.66 | | |EP kw Sale Proceed 390.00 Sale Proceed 220.00 14 Depreciation Method ISL IMACRS After Tax Cash Flow -1.562.81 337.19 337.19 337.19 727.19 After Tax Cash Flow -593.1 205.89 205.89 205.89 358.23 16 Market value after 5 Years 390 220 incremental Cash Flows -959.70 3030 30.30 130.30 358.95 IRR