Extended rainy seasons have required many northwest contractors to upgrade pumps
ID: 371785 • Letter: E
Question
Extended rainy seasons have required many northwest contractors to upgrade pumps and de- watering devices on their projects. A company has identified two alternative pumps: a used pump (P1) and a new automated dewatering system (P2). The economic estimates for each are shown below. Use the AW method and a MARR = 12% to answer the following questions:
Which alternative is preferred, based on the repeatability assumption?
Show, for the co-terminated assumption with a 5-year study period and an imputed market value for Alternative P2, that the AW of P2 remains the same as it was in part (a) and that the same alternative should be selected.
Alternative P1
Alternative P2
Capital investment
-8,000
-95,000
Annual expenses
-7,000
-20,000
Useful life (years)
5
35
Market value (at end of useful life)
4,000
16,000
Alternative P1
Alternative P2
Capital investment
-8,000
-95,000
Annual expenses
-7,000
-20,000
Useful life (years)
5
35
Market value (at end of useful life)
4,000
16,000
Explanation / Answer
Alternative P1
AW of Capital Investment = -8000*(A/P,12%,5) = -8000*0.2774 = -2219.4
AW of Annual expenses = -7000
AW of Market value at the end of useful life = 4000*(A/F,12%,5) = 4000*0.1574 = 629.6
AW of alternative P1 = -2219.4 - 7000 + 629.6 = -8589.8
Alternative P2
AW of Capital Investment = -95000*(A/P,12%,35) = -95000*0.1223 = -11618.5
AW of Annual expenses = -20000
AW of Market value at the end of useful life = 16000*(A/F,12%,35) = 16000*0.00232 = 37.2
AW of alternative P1 = -11618.5 - 20000 + 37.2 = -31581.3
AW is of alternative P1 is higher (less negative), therefore it should be selected.
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