Question

Initial cost End-of-useful life salvage value 2000 1000 Useful life, in years 126 Pump A because it has a higher EUAC

8 percent interest

Answer 1

In the given case, equal uniform annual worth method is to be used to determine the selection of pump.

EUAC of each alternative can be calculated even though the alternatives have different useful life.

Alternative 1 - Pump A

Initial cost = $8,000

Salvage value = $2,000

Useful life = 12 years

Interest rate = 8%

Calculate the EUAC of Pump A -

EUAC = Initial cost(A/P, i, n) - Salvage value(A/F, i, n)

EUAC = 8,000(A/P, 8%, 12) - 2,000(A/F, 8%, 12)

EUAC = [8,000 * 0.13270] - [2,000 * 0.05270]

EUAC = 1,061.6 - 105.4

EUAC = 956.2

The EUAC of Pump A is $956.20

Alternative 2 - Pump B

Initial cost = $5,000

Salvage value = $1,000

Useful life = 6 years

Interest rate = 8%

Calculate the EUAC of Pump B -

EUAC = Initial cost(A/P, i, n) - Salvage value(A/F, i, n)

EUAC = 5,000(A/P, 8%, 6) - 1,000(A/F, 8%, 6)

EUAC = [5,000 * 0.21632] - [1,000 * 0.13632]

EUAC = 1,081.6 - 136.32

EUAC = 945.28

The EUAC of Pump B is $945.28

The Pump B has lower EUAC.

So, Pump B should be selected.

Hence, the correct answer is the option (C) [Pump B because it has a lower EUAC].