Domore\'s Engineering is considering whether to lease or buy an earth moving equ

Question

Domore's Engineering is considering whether to lease or buy an earth moving equipment. The MARR is 8% and the costs of buying an earth m incurring an operating cost of $300 per day, the company has to pay a rental fee of $100 per day Determine the minimum number of days per year that the company has to use the earth m order to justify buying the equipment. over are as follows. If the equipment is leasing, in addition to over in (20 Points) = $150,000 = 10 years = $15,000 = $1,800/year = $1,200 /year = $300/day Purchase Price Life Salvage value Maintenance Insurance Operating cost day

Explanation / Answer

Equivalent annual cost (EAC) of owning the asset is to be calculated first

Present value of annuity (PVA) at 8% for 10 Years = 6.7101

Present vlaue (PV) at 8% in the 10th year = 0.4632

EAC = Investment / PVA - Salvage * PV / PVA + Maintenance + Insurance

= 150000 / 6.7101 - 15000 * 0.4632 / 6.7101 + 1800 + 1200 = 24319

Variable cost of buying = 300 per day

Varaible cost with Leasing = 300 + 100 = 400 per day

Thus there is a saving of 100 per day in buying the equipment.

For buying this equipment, the company must operate for minimum of 24319 / 100 per day

= 24.32 days.....final answer

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