A local construction company wants to replace its heavy equipment fleet which cu

Question

A local construction company wants to replace its heavy equipment fleet which currently has a value of $4,000,000 and remaining life of six years. Operating and maintence cost for the existing equipment is $750, 000 per year. Caterpillar Company will provide replacement heavy equipment. If i = 8% compounded annually, should the construction company keep the existing equipment or purchase the new equipment from Caterpillar? eight years and operating costs that arc - equipment or purchase the annually, should the construction company keep e Caterpillar?

Explanation / Answer

Existing equipment:

PW = -$4,000,000 - $750,000(P/A,8%,6)

PW = -4,000,000 -750,000*4.6228

PW = -4,000,000 – 3,467,100 = -7,467,100.

Replacement equipment:

PW = -$8,000,000 -$(25% less than 750,000)(P/A,8%,8)

PW = -$8,000,000 - $(750,000 - $187,500)(P/A,0.08,8)

PW = -$8,000,000 - $562,500*5.7466

PW = -$8,000,000 - $3,232,462.5 = -$11,232,462.5

Since the existing equipment has a greater present worth value, it’s better the company keep the existing equipment.

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