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Economic Justification of Capital Expenditure

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As a result of design changes, a pump which is rated at 100 KW with an overall efficiency of 80% is now too large for the service.

If you continue to run this pump, the overall efficiency will only be 75%.

To restore the efficiency to 80% you can buy a new impeller for $1500. Would it be economical to purchase a new impeller if the minimum attractive rate of return is 12% and the expected life of the impeller is 5 years?

It will cost $500 to install the new impeller and the cost of energy is 2 cents per KWh.

Assume continuous operation. Use equivalent annual costs.

Solution Preview

First, let's calculate what the inefficiency of the pump under current conditions is costing the plant.

The problem states that the pump currently runs at 75% efficiency. However, with design changes, 80% efficiency can be realized. So, with the pump rated at 100KW, we are losing 5KW per hour due to inefficiency.

Now, the problem also tells us that the cost of energy is 2 cents per KWh and ...

Solution Summary

The solution crosses engineering and financial boundaries to attempt to arrive at a justification for a capital outlay for a new impeller.