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 $1,900, has an overall efficiency of 80.77%, and it delivers 11.4 hp. The other available alternative, pump B, costs $900, has an overall efficiency of 46.79%, and delivers 12.3 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 $380, 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 28%. The cost of electricity is $0.04/kWh, and the pumps are subject to a study period of five years. The IRR of the incremental investment is %. (Round to one decimal place.)
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 $1,900, has an overall efficiency of 80.77%, and it delivers 11.4 hp. The other available alternative, pump B, costs $900, has an overall efficiency of 46.79%, and delivers 12.3 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 $380, 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 28%. The cost of electricity is $0.04/kWh, and the pumps are subject to a study period of five years. The IRR of the incremental investment is %. (Round to one decimal place.)
Chapter1: Making Economics Decisions
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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 $1,900, has an overall efficiency of 80.77%, and it delivers 11.4 hp. The other
available alternative, pump B, costs $900, has an overall efficiency of 46.79%, and delivers
12.3 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 $380, 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
28%. The cost of electricity is $0.04/kWh, and the pumps are subject to a study period of
five years.
The IRR of the incremental investment is %. (Round to one decimal place.)
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