Problem 05.031 Future Worth Analysis A small strip-mining coal company is trying

Question

Problem 05.031 Future Worth Analysis A small strip-mining coal company is trying to decide whether it should purchase or lease a new clamshell If purchased, the "shel" wil cost $145,000 and is expected to have a $37,500 salvage value after 6 years. Alternatively, the company can lease a $20,000 per year, but the lease payment will have to be made at the beginning of each year If the clamshell is purchased, it will be leased to other strip-mining companies whenever possible, an activity that is expected to yield revenues of $14.000 per year. Itf points for only the company's MARR is 18% per year, should the clamshell be purchased or leased on the basis of a future worth analysis? Assume the annual M&O cost is the same for both options. The future worth when purchased is s [25924181 0 The future worth when leased is $ 222830.43 The clamshell should be [purchased purchased

Explanation / Answer

Alternative- Purchase Year Cashflows FVF @18% Future Value 0 -145,000 2.6995542 -391435 1 14000 2.2877578 32028.61 2 14000 1.9387778 27142.89 3 14000 1.643032 23002.45 4 14000 1.3924 19493.6 5 14000 1.18 16520 6 51500 1 51500 Future value of cashflows -221748 Alternative -Leased Year Cashflows FVF @18% Future Value 0 -20,000 2.6995542 -53991.1 1 -20,000 2.2877578 -45755.2 2 -20,000 1.9387778 -38775.6 3 -20,000 1.643032 -32860.6 4 -20,000 1.3924 -27848 5 -20,000 1.18 -23600 6 0 1 0 Future value of cashflows -222830 The Clamshell shall be PURCHASED

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