A problem often discussed in the engineering economy literature is the "oil-well pump problem"} Pump...

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A problem often discussed in the engineering economy literature is the "oil-well pump problem"} Pump 1is a small pump; Pump 2 is a larger pump that costs more, will produce slightly more oil, and will produce it more rapidly. If the MARR is 20%, which pump should be selected? Assume that any temporary external investment of money earns 10% per year and that any temporary financing is done at 6%. } One of the more interesting exchanges of opinion about this problem is in Prof. Martin Wahl’s "Common
Misunderstandings About the Internal Rate of Return and Net Present Value Economic Analysis Methods;" and the associated discussion by Professors Winfrey, Leavenworth, Steiner, and Bergmann, published in Evaluating Transportation Proposals, Transportation Research Record 731, Transportation Research Board, Washington, D.C. See also Appendix 7A in Chapter 7.
Pump 1 Pump2
Year ($000s) ($000s)
0 -$100 -$110
 XXXXXXXXXX
 XXXXXXXXXX

David · Accepted Answer

Year Pump 1 Pump 2 Increment 2- 1 
0 -$100 -$110 -$10 
1 +$70 +$115 +$45 
2 $70 $30 -$40
Transformation x(1 + 0.10)=$ = $40 
Solve for x: x = $40/1.1
             = $36.36 
Year Transformed 
Increment 2 
- 1 
0 -$10 
1 +$8.64 
2 $0
$40

A problem often discussed in the engineering economy literature is the "oil-well pump problem"} Pump 1is a small pump; Pump 2 is a larger pump that costs more, will produce slightly more oil, and will...

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