Scenario: A residential contractor specializing in small- to medium-sized single

Question

Scenario: A residential contractor specializing in small- to medium-sized single-family home construction wishes to expand its operations into multi-family residences, including two- family and condominium-type housing, with possible work in site development through development of private housing communities. It anticipates that it will create this growth by generating additional projects, for a total project portfolio of approximately $15 million per year. The contractor has an MARR on investments of 9%. The contractor wants to purchase a heavy-duty crane costing $500,000 to assist with its expansion. The crane can be salvaged at 5% of its purchasecost Assume a total service life of 15,000 hours.

Explanation / Answer

Contractor $ $ Portfolio 15000000 per year MARR 9.00% Cost of crane 500000 Useful life 15000 hours Salvage value 125000 Question # 2 New project Month 0 1 2 3 Direct + Indirect Costs 200000 175000 175000 Crane (5000 hours) 500000 125000 125000 125000 Cost 500000 minus salvage 125000 375000 Sub total 325000 300000 300000 Markup (11%) 35750 33000 33000 Sub total 685750 633000 633000 Finance charges (1.5%) 34288 31650 31650 Sub total 720038 664650 664650 Retainage (10%) 72004 Balance 648034 664650 664650 Receipts (1 month from billing) 648034 664650 664650 Overdraft required 576030 16616 0 Maximum overdraft 576030 Net cash inflow -375000 -576030 631418 664650 IRR 18% The Internal Rate of Return (IRR) is greater than the MARR of 9% Profit 648034 664650 664650

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