Ahigh pressure pump at a methane gas Douel) rMemphis costs S29,000 for instalati

Question

Ahigh pressure pump at a methane gas Douel) rMemphis costs S29,000 for instalation and has an estimated fe of t2 years Dyhe addition of a specialred-ofa iny oornent anan u "oplbie at any lme"the MARR is 7% seep of oin oper trg experse for the pump oan be realized, and the estimated ile of the pump can bo do tied to 24 years The savage (market) value ofether a tem aw. ) Click ??? icon to view the rterest and annuity table tor disowte compording when i+7% per year The maximum expenditure for the i quipment is $ 2400 Round to he nearest hunreds year, what present expenditure for the auxiliary équipment can plant managers justily spending?

Explanation / Answer

Cost of the pump is a sunk cost and is not included in decision making process. Maximum expenditure on the auxiliary equipment is the present value of future benefits (annual saving) the equipment will fetch.

Maximum expenditure ($) = 300 x PVIFA(7%, 24) = 300 x 11.4693** = 3,441 ~ 3,400 (Rounded to nearest hundred)

**From PVIFA factor table

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