Question

A municipal council purchased a water supply pump at a cost of RM 200,000 two years ago to be useful for eight years. This pump can be replaced with an improved version for preference and satisfaction of public water supply in municipal area. The present market value, annual maintenance cost and ultimate salvage value of the two pumps are given in Table 4. The expected economic life of the improved version pump is six years. The bank interest rate is 12%, compounded annually i) Estimate the annual equivalent cost of the two water supply pumps (16 Marks) ii) Justify your opinion to select the best one using the Annual Equivalent Method (AEM) (3 Marks) Table 4: Comparison of two water supply pumps Option Present market Annual maintenance Ultimate salvage value value cost Present water suppl;y 25,000 120,000 25,000 um Improved versio 14,000 150,000 20,000 um

Answer 1

Present water supply pump

Present market value = RM 120,000

Annual maintenance cost = RM 25,000

Salvage value = RM 25,000

Annual equivalent cost = - 120,000(A/P,12%,6) - 25,000 +25,000 (A/F,12%,6)

=-120,000×0.2432 - 25,000 + 25,000×0.1232

= - $ 51,104

Now, calculating annual worth of improved version

AEC = -150,000(A/P,12%,6) - 14,000 + 20,000(A/F,12%,6)

= - 150,000×0.2432 - 14,000 + 20,000×0.1232

= - $ 48,016

ii. Select improved version of pump. The annual worth of improved version is lowest. Therefore, select the pump.

Please contact before rating up. Will be obliged to you for your help. Please help me it mean a lot to me. Thank you.