An energy efficient pump is proposed by a vendor The pump wi

An energy efficient pump is proposed by a vendor. The pump will cost $45,000 installed, and will require $2,000 worth of maintenance each year for its life of 15 years. Energy costs will be $6,000 per year. A standard pump will cost $25,000 and will require $1500 worth of maintenance each year. Its energy costs will be $10,000 per year. If your company uses a MARR (Minimum Atrractive Rate of Return) of 10%, would you invest in the energy efficient pump?

Solution

Pump A

Initial cost = 45000

Maintanence cost - 30000 (2000*15)

Energy cost - 90000(6000*15)

Total cost = 165000

Pump B Initital cost - 25000

maintainence cost - 22500(1500*15)

Enrgy cost = 150000(10000*15)

total cost -= 197500

Extra cost - 45000-25000 = 20000

MARR = 20000*0.10 *4 = 8000

Difference in total cost = 197500-165000 = 32500

Since difference in cost is more than difference 8000, we should buy energy efficient pump.