Two pumps are being considered for purchase for a service life of 10 years. Interest rate is 5% Alternatives Pump 1 Pump 2 $60,000 $75,000 Apply the present worth technique, which pump should be considered? k Solution: 1. Neither input nor output is the same, calculate the net present worth (NPW) 2. NPW o Initial cost: PW Equivalent PW for salvage and replacement together. PW= k o Thus NPW= Initial Cost Estimated salvage value at end of useful life k Cash flow at the end of 10 years, PW= k. 3. NPW Initial cost: PW= Useful Life 6 years 12 years Estimated market value, end of 10-year $12,000 $15,000 k Equivalent PW for salvage and replacement together: PW= k Thus NPW= k Cash flow at the end of 10 years, PW= k. 4. Hence use $10,000 $12,000