5. (10 points) Aroad building contractor has received a major highway constructi

Question

5. (10 points) Aroad building contractor has received a major highway construction contract that will require 60,000 m of crushed stone each year for 6 years. The stone can be obtained from a quarry for $8.8/m. As an alternative, the contractor has decided to try to buy the quarry. He believes that if he owned the quarry, the stone would cost him only S6.3/m, He thinks he could resell the quarry at the end of 6 years for S250.000. If the contractor uses a l2% interest rate, how much would he be willing to pay for the quarry?

Explanation / Answer

Find the present worth of the quarry by assuming it to be X. Annual equivalent cost should be same in both cases

8.8*60000 = X(A/P, 12%, 6) + 6.3*60000 - 250000(A/F, 12%,6)

528000 = X*0.24323 + 378000 - 250000*0.1232

0.24323X = 180800

X* = $743329

He can pay a maximum of $743329 to own a quarry.

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