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MCS,PHD
Argosy University/ Phoniex University/
Nov-2005 - Oct-2011
Professor
Phoniex University
Oct-2001 - Nov-2016
7-40. Individual industries will use energy as efficiently  as  it  is   economical  to  do  so,  and there are several incentives to improve the efficiency
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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 82.06%, and it delivers 11 hp. The other available alternative, pump B, costs $1,000, has an overall efficiency of 45.13%, and delivers 12.1 hp. Both
TABLE P7-39 Table for Problem 7-39
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|
 |
Fixture X |
Fixture Y |
|
Capital investment |
$30,000 |
$40,000 |
|
Annual operating expenses |
$3,000 |
$2,500 |
|
Useful life |
6 years |
8 years |
|
Market value |
$6,000 |
$4,000 |
|
Depreciation method |
SL to zero book |
MACRS (GDS) with 5-year |
|
 |
value over 5 years |
recovery period |
pumps have a useful life of five years and will be sold at that time. (Remember 1 hp = 0.746 kW.)
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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.
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Using the IRR method on the after-tax cash flows and a before-tax MARR of 16.67%, is the incremental investment in pump A economically justifiable? The effective income tax rate is 40%. The cost of electricity is $0.05/kWh, and the pumps are subject to a study period of five years. (7.10)
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