Two pumps are being considered for pumping water from a reservior. Installed cost and salvage value for two pumps are given below :
Pump A Pump B
Installed Cost $20000 $ 25000
Salvage value $2000 $ 4000
Pump A has a service life of 4 years. Determine the service life of Pump B at which the two pumps are competitive if the annual effective interest rate is 15%.
Competitiveness refers to the requirements that the installed cost of the pump plus the amount that must be invested at the time of installation so that sufficient interest will be earned over the service life to replace the pumps at the original cost.