A client is considering purchasing a new high efficiency pump and motor, with an initial cost of $10,000. The pump has a lifetime of 15 years and is estimated to save approximately $1,000 per year. There is an additional maintenance cost of $300 per year associated with this new pump. The pump will have a salvage value of $0 at the end of its lifetime. Assume the interest rate is 4%. What is the annual value of the pump

The annual value of the equipment can be determined by calculating the annuity value of the savings and deducting the annuity value of the maintenance cost and then dividing the number by the annuity factor.

Data and Calculations:

Cost of high-efficiency pump and motor = $10,000

Estimated lifetime = 15 years

Savings per year = $1,000

Total savings over equipment's lifetime = $11,120 ($1,000 x 11.12)

Annual maintenance cost = $300

Total annual maintenance cost for 15 years = $3,426 ($300 x 11.12)

Annuity Factor at 4% for 15 years = 11.12

Annual value = $692 ($11,120 - $3,426)/11.12

Thus, the annual value of the pump is $692.

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