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Your first assignment as a production engineer is to determine whether you should replace an existing pump now or two years from now. Your boss
Your first assignment as a production engineer is to determine whether you should replace an existing pump now or two years from now. Your boss has given you the following information: Project Life: 5 years $0 Salvage Value 2 year remaining life Existing Pump: New Pump: CHOICE: Replace existing pump now with the new unit which is more efficient. Salvage OR: Operating Costs are $8,000 per year Initial Cost: $22,000 Operating Costs would be $4,000 per year. value of the new pump if purchased now would be $2,000 at end of 5 years Replace existing pump after 2 years when it has worn out. The salvage value of the new pump at the end of the project would be $10,000 since it would have been in service for only 3 years. Assume all operating costs are paid at the middle of each year. The time value of money is 12% APR compounded annually
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