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 8 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 fiv 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 f $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 GDS Recovery Rates (rk) - X
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 8 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 fiv 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 f $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 GDS Recovery Rates (rk) - X
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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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