1. A crawler tractor costs $163,000 to purchase. Fue are estimated to cost $32.1
ID: 1714643 • Letter: 1
Question
1. A crawler tractor costs $163,000 to purchase. Fue are estimated to cost $32.14 per operating hour. A major engine rep will probably be required after 7,200 hour of use. The expected resale price (salvage value) is 21% of the original purchase price. The machine should last 10,800 hr. How much should the owner of the machine charge (excluding profit and overhead) per hour of use, if it is expected that the machine will operate 1,800 hours per year? The company's cost of capital rate is 7.3% and it uses double declining balance method for depreciation for its assets. Also, how much (S) the company should bank now if the company wants to buy a new one after this one's usable life is exhausted. Assuming the new one will cost $200,000 at that time and assuming interest rate at 2%. , Oil, Grease, and minor maintenance air costing S12,000Explanation / Answer
Cash Flow and Present value statement Year Initial Outflow Maitenance outflow Major repair Salvage value Net Cash outflow DF @ 7.3% PV of Net Cash outflow 0 163000 163000 1 $ 1,63,000 1 57852 57852 0.932 $ 53,916 2 57852 57852 0.869 $ 50,248 3 57852 57852 0.809 $ 46,829 4 57852 12000 69852 0.754 $ 52,696 5 57852 57852 0.703 $ 40,674 6 57852 34230 23622 0.655 $ 15,478 Total $ 4,22,842 Annuity Factor for 6 years @ 7.3% 4.723 Annualised cost in present value terms $ 89,528 Hour of operation 1800 Charge per hour $ 50 Discounting Factor for 6 years @ 2% 0.888 (1+0.02)^(-6) Present value of $200000 required at year 6 $ 1,77,600 Present value od salvage of old machine $ 30,396 $ 1,47,204 Company should bank now $ 1,47,204
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