TABLE 9-1 Summary of Information for Example 9-3 MARR (before taxes) = 10% per year Existing Pump A (defender) Capital investment when purchased five years ago Annual expenses: Replacement of impeller and bearings Operating and maintenance $17,000 $1,750 3,250 Taxes and insurance: $17,000 x 0.02 Total annual expenses Present MV 340 $5,340 $750 Estimated market value at the end of nine additional years $200 Replacement Pump B ( challenger ) Capital investment Annual expenses: Operating and maintenance $16,000 $3,000 320 Taxes and insurance: $16,000 × 0.02 Total annual expenses Estimated MV at the end of nine years: $16,000 × 0.20 $3,320 $3,200
The manager of a carpet manufacturing plant became concerned about the
operation of a critical pump in one of the processes. After discussing this situation with the supervisor of plant engineering, they decided that a replacement study should be done, and that a nine-year study period would be appropriate for this situation. The company that owns the plant is using a before-tax MARR of 10% per year for its capital investment projects. The existing pump, Pump A, including driving motor with integrated controls, cost $17,000 five years ago. An estimated MV of $750 could be obtained for the pump if it were sold now. Some reliability problems have been experienced with Pump A, including annual replacement of the impeller and bearings at a cost of $1,750. Annual operating and maintenance expenses have been averaging $3,250. Annual insurance and property tax expenses are 2% of the initial capital investment. It appears that the pump will provide adequate service for another nine years if the present maintenance and repair practice is
continued. It is estimated that if this pump is continued in service, its final MV after nine more years will be about $200. An alternative to keeping the existing pump in service is to sell it immediately and to purchase a replacement pump, Pump B, for $16,000. An estimated MV at the end of the nine-year study period would be 20% of the initial capital investment. Operating and maintenance expenses for the new pump are estimated to be $3,000 per year. Annual taxes and insurance would total 2% of the initial capital investment. The data are summarized in the shown Table. Based on these data, should the defender (Pump A) be kept [and the challenger (Pump B) not purchased], or should the challenger be purchased now (and
the defender sold)? Use a before-tax analysis and the outsider viewpoint in the evaluation.
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