1. A municipality 5 years ago purchased a pump for its sewage treatment plant at $6,000. The pump had annual operating costs of $3,200 and these are expected to continue. This pump is expected to continue to operate satisfactorily for 6 additional years, at which tie it may be expected to have negligible salvage value. The municipality has an opportunity to purchase a new pump for $8,500. The new pump is estimated to have a life of 6 years, negligible salvage value at the end of its life, and an annual operating cost of $1,400. If the new pump is purchased, the old pump will be sold for $1,600. The interest rate is 12%. With no knowledge of future replacements and a 6 year study period, what option should be selected? Answer [AE(12)D = $3589 and AE(12)c = $3467]
1. A municipality 5 years ago purchased a pump for its sewage treatment plant at $6,000. The pump had annual operating costs of $3,200 and these are expected to continue. This pump is expected to continue to operate satisfactorily for 6 additional years, at which tie it may be expected to have negligible salvage value. The municipality has an opportunity to purchase a new pump for $8,500. The new pump is estimated to have a life of 6 years, negligible salvage value at the end of its life, and an annual operating cost of $1,400. If the new pump is purchased, the old pump will be sold for $1,600. The interest rate is 12%. With no knowledge of future replacements and a 6 year study period, what option should be selected? Answer [AE(12)D = $3589 and AE(12)c = $3467]
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![1. A municipality 5 years ago purchased a pump for its sewage treatment plant at $6,000.
The pump had annual operating costs of $3,200 and these are expected to continue. This
pump is expected to continue to operate satisfactorily for 6 additional years, at which tie it
may be expected to have negligible salvage value. The municipality has an opportunity to
purchase a new pump for $8,500. The new pump is estimated to have a life of 6 years,
negligible salvage value at the end of its life, and an annual operating cost of $1,400. If the
new pump is purchased, the old pump will be sold for $1,600. The interest rate is 12% . With
no knowledge of future replacements and a 6 year study period, what option should be
selected?
Answer [AE(12)D = $3589 and AE(12)c = $3467]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff5230a5b-1861-449c-980c-891c7393bfbb%2F2befe6e3-dfbc-4d8d-b443-eb6f37e2b30a%2F02gujyp_processed.jpeg&w=3840&q=75)
Transcribed Image Text:1. A municipality 5 years ago purchased a pump for its sewage treatment plant at $6,000.
The pump had annual operating costs of $3,200 and these are expected to continue. This
pump is expected to continue to operate satisfactorily for 6 additional years, at which tie it
may be expected to have negligible salvage value. The municipality has an opportunity to
purchase a new pump for $8,500. The new pump is estimated to have a life of 6 years,
negligible salvage value at the end of its life, and an annual operating cost of $1,400. If the
new pump is purchased, the old pump will be sold for $1,600. The interest rate is 12% . With
no knowledge of future replacements and a 6 year study period, what option should be
selected?
Answer [AE(12)D = $3589 and AE(12)c = $3467]
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