A large processing plant is trying to decide between two air scrubbing units. Th

Question

A large processing plant is trying to decide between two air scrubbing units. The unit is required by clean air regulations and will be replaced by an identical unit of itself at the end of its useful life into the foreseeable future. Costs and benefits are as follows: Cash Flow A B Initial cost $17,600 $24,500 O & M costs / year $ 2,500 $ 1,950 Salvage value $ 2,250 $ 7,500 Useful life (years) 9 11 Assume an interest rate of 12% per year. Use equivalent uniform annual cash flow analysis to determine which pump should be selected.

Explanation / Answer

AW = -100,000(0.20) - 30,000 - 50,000(A/F,20%,5)   = $-56,719 per year

Therefore

PUMP B should be selected

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