Question

A high-pressure pump at a methane gas (biofuel) plant in Memphis costs $30,000 for installation and has an estimated life of 12 years. By the addition of a specialized piece of auxiliary equipment, an annual savings of $400 in operating expense for the pump can be realized, and the estimated life of the pump can be doubled to 24 years. The salvage (market) value of either alternative is negligible at any time. If the MARR is 7% per year, what present expenditure for the auxiliary equipment can plant managers justify spending? Click the icon to view the interest and annuity table for discrete compounding when i: 7% per year. The auxiliary equipment installation cost is s(Round to the nearest hundreds)

Answer 1

Answer: -

The installation cost equal to the present value of annual savings plus the investment at the end of 12 years of 30000 (since life is doubled) can be justified by the managers.

Equipment installation cost = PV of annual savings + PV of equipment investment

= 400/ (1.07) + 400/1.07^2 + ++++ + 400/ (1.07^24) + 30000/(1.07^12)

= 17908.129

Any amount less than this can be justified.