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 80.58%, and it delivers 11 hp. The other available altemative, pump B, costs $1,200, has an overall efficiency of 44.39%, and delivers 12.8 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 $410, and pump B has an actual market value of $180. 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 26%. The cost of electricity is $0.05/kWh, and the pumps are subject to a study period of five years.

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 80.58%, and it delivers 11 hp. The other available altemative, pump B, costs $1,200, has an overall efficiency of 44.39%, and delivers 12.8 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 $410, and pump B has an actual market value of $180. 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 26%. The cost of electricity is $0.05/kWh, and the pumps are subject to a study period of five years.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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