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 "shell will cost $147500 and is expected to have a $40000 salvage value after 6 years Alternatively, the company can lease a clamshell for only $10,000 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 $15,000 per year If the companys lMARR is 19% 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 gptions The future worth, when purchased is $ ] The future worth when leased is The clamshell should be Tclick to selecty

Explanation / Answer

Future Worth (FW) are computed as follows.

FW, Purchase ($) = -147,500 x F/P(19%, 6) + 15,000 x F/A(19%, 6) + 40,000

= -147,500 x 2.8398** + 15,000 x 9.6830** + 40,000 = -418,870.5 + 145,245 + 40,000 = -233,625.5

FW, Lease ($) = -10,000 x F/A(19%, 6) x 1.19# = -11,900 x 9.6830** = -115,227.7

Since negative FW of Lease is lower, the clamshell should be leased.

**From F/P and F/A Factor tables

# Since lease payment is made at beginning of each year, a multiplication factor of (1 + interest rate) has to be added

NOTE: If positive values are to be entered, please entered the values as $233,625.5 & $115,227.7

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