Individual industries will use energy as efficiently as it is economical to do so, and there are several incentives to improve the efficiency of energy consumption. To illustrate, consider the selection of a new water pump. The pump is to operate 800 hours per year. Pump A costs $2,000, has an overall efficiency of 83.7%, and it delivers 11.2 hp. The other available alternative, pump B, costs $800, has an overall efficiency of 43.06%, and delivers 11.9 hp. Both pumps have a useful life of five years and will be sold at that time. (Remember 1 hp = 0.746 KW.) Pump A will use SL depreciation over five years with an estimated SV of zero. Pump B will use the MACRS depreciation method with a class life of three years. After five years, pump A has an actual market value of $400, and pump B has an actual market value of $200. Using the IRR method on the after-tax cash flows and a before-tax MARR of 20%, is the incremental investment in pump A economically justifiable? The effective income tax rate is 30%. The cost of electricity is $0.05/kWh, and the pumps are subject to a study period of five years. Click the icon to view the GDS Recovery Rates (r) for the 3-year property class. The IRR of the incremental investment is -74%. (Round to one decimal place.) More Info Year 1 2 4 GDS Recovery Rates (r) 3-year Property Class 0.3333 0.4445 Print 0.1481 0.0741 Done
Individual industries will use energy as efficiently as it is economical to do so, and there are several incentives to improve the efficiency of energy consumption. To illustrate, consider the selection of a new water pump. The pump is to operate 800 hours per year. Pump A costs $2,000, has an overall efficiency of 83.7%, and it delivers 11.2 hp. The other available alternative, pump B, costs $800, has an overall efficiency of 43.06%, and delivers 11.9 hp. Both pumps have a useful life of five years and will be sold at that time. (Remember 1 hp = 0.746 KW.) Pump A will use SL depreciation over five years with an estimated SV of zero. Pump B will use the MACRS depreciation method with a class life of three years. After five years, pump A has an actual market value of $400, and pump B has an actual market value of $200. Using the IRR method on the after-tax cash flows and a before-tax MARR of 20%, is the incremental investment in pump A economically justifiable? The effective income tax rate is 30%. The cost of electricity is $0.05/kWh, and the pumps are subject to a study period of five years. Click the icon to view the GDS Recovery Rates (r) for the 3-year property class. The IRR of the incremental investment is -74%. (Round to one decimal place.) More Info Year 1 2 4 GDS Recovery Rates (r) 3-year Property Class 0.3333 0.4445 Print 0.1481 0.0741 Done
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Individual industries will use energy as efficiently as it is economical to do so, and there are several incentives to improve the efficiency of energy consumption. To illustrate, consider the selection of a new water pump. The pump is to operate 800
hours per year. Pump A costs $2,000, has an overall efficiency of 83.7%, and it delivers 11.2 hp. The other available alternative, pump B, costs $800, has an overall efficiency of 43.06%, and delivers 11.9 hp. Both pumps have a useful life of five
years and will be sold at that time. (Remember 1 hp = 0.746 kW.)
Pump A will use SL depreciation over five years with an estimated SV of zero. Pump B will use the MACRS depreciation method with a class life of three years. After five years, pump A has an actual market value of $400, and pump B has an
actual market value of $200.
Using the IRR method on the after-tax cash flows and a before-tax MARR of 20%, is the incremental investment in pump A economically justifiable? The effective income tax rate is 30%. The cost of electricity is $0.05/kWh, and the pumps are
subject to a study period of five years.
Click the icon to view the GDS Recovery Rates (rk) for the 3-year property class.
The IRR of the incremental investment is - 74 %. (Round to one decimal place.)
More Info
Year
1
2
3
4
GDS Recovery Rates (rk)
3-year Property Class
0.3333
0.4445
Print
0.1481
0.0741
Done
-
X
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