21. The purchase of a bulldozer is contemplated for rental to a construction con

Question

21. The purchase of a bulldozer is contemplated for rental to a construction contractor who needs and use such equipment on a temporary basis. The anticipated receipts and disbursements of this alternative are: Date 1-1-1980 1-1-1981 1-1-1982 1-1-1982 1-1-1983 1-1-1984 1-1-1984 Cost Rental (1t year) Rental (2nd year) $28,000 7,500 7,500 2,500 7,500 7,500 Overhaul Rental (3rd year) Rental (4h year) Salvage value 6,000 Notes: Consider the end of a year and the start of the next the same point in time. If the interest rate you can obtain by investing your money is 10% annually; will you justify the purchase of the Bulldozer?

Explanation / Answer

If it is leased:

P= 7,500(P/A, 10%, 4)+ 2,500(P/F, 10%, 2)

=23775+ 2065

= $ 25,840

Considering the purchase of dozer will require overhaul:

P = -28000 + 6,000(P/F, 10%, 4) -2,500(P/F, 10%, 2)

= -28000+ 4098 – 2065

= $-30,033

From above it is better to lease the Bulldozer than purchasing.

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