Signature: Jocelyn, the owner of a construction complete a contract awarded to h

Question

Signature: Jocelyn, the owner of a construction complete a contract awarded to her company. The first cost of the equipment is $250,000 with a life of 3 years at which time she will no longer need the equipment. The operating cost is expected to be $75,000 per year. Alternatively, a subcontractor can perform the work for $175,000 per year Because the equipment is specialized, Jocelyn is not sure about the salvage value. She estimates a likely salvage of $90,000, but it might have to be scrapped for as little as $10,000 in three years. The MARR is 15% per year. company, is planning to purchase specialized equipment to a. Is her decision to buy the equipment sensitive to the salvage value? b. Determine the salvage value at which the two alternatives break even

Explanation / Answer

a)Yes ,The decision is to buy is sensitive to salvage value as recovery of salvage at end of useful life will reduce the present value of Total cost .Higher the salvage value ,lower will be the cost of alternative.

B)Present value of subcontract cost :PVA15%,3 *A

                 = 2.28323* 175000

                  = 399565.25

at break even ,Total cost under both alternative will be equal.

Cost of alternative 1 (Purchase) =Initial cost+Present value of operating cost (PVA15%,3*A)-Salvage at break even (PVF 15%,*S)

399565.25 = 250000+[2.28323*75000]- [.65752*S]

                = 250000 + 171242.25- .65752 S

                = 421242.25- .65752S

.65752 S = 421242.25 -399565.25

          s = 21677/.65752

          Salvage = $ 32967.82   [rounded to 32968 ]

Break even salvage = $ 32968

**Find present value annuity factor and present value from table respectively at 15%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.