Question

A standard electric motor is rated at 10 horsepower (HP) and costs $800. Its fullload

efficiency is specified to be 92%. A newly designed, high efficiency motor of

the same size has an efficiency of 95%, but costs $1,200. It is estimated that the

motors will operate at a rated 10-HP output for 2,000 hours a year, and the cost of

energy will be $0.07 per kilowatt-hour. Each motor is expected to have 12-year

life. At the end of 12 years, the first motor will have a salvage value of $50, and

the second motor will have a salvage value of $100. Consider the MARR to be

8%. (Note: 1HP = 0.7457 KW)

What is the net present value (NPW) of the cash flows associated with the high

efficiency motor?

Answer 1

Step 1 : Identification of Alternatives

Alternative 1 Standard Motor

Alternative 2 High Efficiency Motor

Step 2: Table showing Data for Both the Machines

Particulars	Standard Motor	High Efficiency Motor
Efficiency	92%	95%
Cost	$800.00	$1,200.00
Operating Hours	2000	2000
Cost of Energy Per KWH	$0.07	$0.07
Life	12	12
Salvage	$50.00	$100.00
Interest Rate	8%	8%

Step3 : Required NPV of New Efficient Machine

NPV= Present Value of Cash Inflows - Present Value of Cash Outflows

Calculation of NPV

Particulars	High Efficiency Motor	Period	PVF @8%	Present Value
Cash Outflows
Cost of Motor	$(1,200.00)	0	1	$(1,200.00)
Cash Inflows
Annual Revenue (Note 1)	$991.78	1-12	7.536	$7,474.06
Salvage Value	$100.00	12	0.397	$39.70
NPV				$6,313.76

NPV of New Efficiency Motor is $6313.76

Notes

1. Calculation of Cash Flows from New Efficient Machine

Particulars	High Efficiency Motor
Cash Outflows
Cost of Motor	$(1,200.00)
Cash Inflows
Efficiency	95%
Operating Hours	2000
Output In HP	19000
Output in KW (units) (A)	14168.3
Cost of Energy Per KWH (B)	$0.07
Revenue/ Cash Inflows (A)x(B)	$ 991.78
Salvage at the end of Yr 12	$100.00