Question: A small heat pump, including the duct system, now costs $2,500 to purchase and install. It has a useful life of 15 years and incurs annual maintenance expenses of $100 per year in real (year-zero) dollars over its useful life. A compressor replacement is required at the end of the eighth year at a cost of $500 in real dollars. The annual cost of electricity for the heat pump is $680, based on present prices. Electricity prices are projected to increase at an annual rate of 10%. All other costs are expected to increase at 6%, which is the projected general price inflation rate. The firm's MARR, which includes an allowance for general price inflation, is 15% per year (im). No market value is expected from the heat pump at the end of 15 years.
a. What is the AW, expressed in actual dollars, of owning and operating the heat pump?
b. What is the AW in real dollars of owning and operating the heat pump?