Question: The manager of a carpet manufacturing plant became concerned about the operation of a critical pump in one of the processes. After discussing this situation with supervisor of plant engineering, they decided that a replacement study should be done. They decided that a nine year study period would be appropriate. The company that owns the plant is using a before-tax MARR of 10 % per year for its capital investment project.

The existing pump, Pump A, including driving motor with integrated controls, cost $17,000 five years ago. An estimated market value of $750 could be obtained for the pump if it were sold now. Some reliability problems have been experienced with pump A, including annual replacement of the impeller and bearings at a cost of $1750. Annual operating and maintenance costs have been averaging $3,250. Annual insurance and property tax expenses are 2% of the initial capital investment. It appears that the pump will provide adequate service for another nine years if the present maintenance and repair practice is continued. It is estimated that if this pump is continued in services, its final market value after nine more years will be about $200.

An alternative to keeping the existing pump in service is to sell it immediately and to purchase a replacement pump. Pump B, for $16,000. An estimated market value of this pump at end of the nine year study period would be 20% of the initial capital investment. O&M expenses for the new pump are estimated to be $3,000 per year. Annual taxes and insurance would total 2% of the initial capital investment.

Base on this data, should the defender (Pump A) be kept, or should the challenger (pump B) be purchased now? Use a before-tax analysis and a 10% MARR. Ensure you provide a cash flow diagram.