Question

Problem 5 Which pump should be chosen if the MARR is 12%? Cost Annual Operating Cost Useful Years Brass $13,000 $2200/year Stainless Steel $17,000 $1950/year 12

Answer 1

Since the useful life of twp pumps are different, we need to compute the equalized annual cost of the two pumps as follows:

Equalized annual cost of Brass pump is computed as shown below:

= $ 13,000 + $ 2,200 / 1.12¹ + $ 2,200 / 1.12² + $ 2,200 / 1.12³ + $ 2,200 / 1.12⁴ + $ 2,200 / 1.12⁵ + $ 2,200 / 1.12⁶ + $ 2,200 / 1.12⁷ + $ 2,200 / 1.12⁸

= $ 23,928.81 Approximately

Equalized annual cost will be:

= $ 23,928.81 / PVAF of 12% for 8 years

= $ 23,928.81 / 4.9676

= $ 4,816.98 Approximately

Equalized annual cost of Stainless steel pump is computed as shown below:

= $ 17,000 + $ 1,950 / 1.12¹ + $ 1,950 / 1.12² + $ 1,950 / 1.12³ + $ 1,950 / 1.12⁴ + $ 1,950 / 1.12⁵ + $ 1,950 / 1.12⁶ + $ 1,950 / 1.12⁷ + $ 1,950 / 1.12⁸ + $ 1,950 / 1.12⁹ + $ 1,950 / 1.12¹⁰ + $ 1,950 / 1.12¹¹ + $ 1,950 / 1.12¹²

= $ 29,079.03 Approximately

Equalized annual cost will be:

= $ 29,079.03 / PVAF of 12% for 12 years

= $ 29,079.03 / 6.1944

= $ 4,694.41 Approximately

As can be seen the equalized annual cost of pump Stainless steel is lower than the equalized annual cost of pump Brass, hence the pump stainless steel shall be choosen.