Question: Individual industries will use energy as efficiently as it is economical to do so, and there are several incentives to improve the efficiency 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 pumps have a useful life of five years and will be sold at that time. (Remember 1 hp = 0.746 kW.) PumpAwill 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. 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.