Question

A. A pump has failed in a facility that will be completely replaced in 5 years. The new pump costs $6,000 and the annual O&M costs will be $1,200 from EOY1 to EOY4. It is anticipated that the pump will be sold for $1,500 at the end of the fifth year.

Use an interest rate of 12% to calculate the present worth of this new pump investment. [3 points]

B. Allen bought a new automobile with a $5,000 up-front payment and a loan with 12% annual interest, compounded monthly. The loan payments are $500 each month and he should pay off the entire loan at the end of 60th months.
i. Calculate the present worth of this car. [2 points]
ii. Determine how much has been paid after the 40th payment. [2 points]

C. The Better-bit Construction Company has a series of equal, quarterly cash flows of $1,200, starting with a cash flow on January 1, 2013 and ending on July 1, 2016. Using an interest rate of 16% and quarterly compounding, determine the single amount on January 1, 2013 equivalent to the total cash flow. [2 points]

Answer 1

(A)

Present Worth (of Costs) of new pump ($) = 6,000 + 1,200 x P/A(12%, 4) - 1,500 x P/F(12%, 5)^#

= 6,000 + 1,200 x 3.0373** - 1,500 x 0.5674**

= 6,000 + 3,644.76 - 851.1

= 8,793.66

**From P/A and P/F Factor tables

# Since we are computing PW of Costs (a cash outflow), present value of salvage value (which is a cash inflow) is deduced. However, if question asks to enter the answer as a PW of Benefit, then enter answer is "-8,793.66".

NOTE: As per Answering Policy, 1st question is answered.