Question 5 1 pts The economic estimates for two cranes are shown in the table be

Question

Question 5 1 pts The economic estimates for two cranes are shown in the table below. The study period is nine years. For the case of alternative A, you would have to lease a crane for the final three years. Annual leasing costs will be $66,000 per year plus the annual expenses of $28.800 per year The MARR is 15% per year. What is the incremental ERR (delta ERR) for both alternatives? Which alternative should be selected? (Hint: You must purchase a crane, do nothing is not an option) Capital investment $272,000 $346,000 Annual expenses 28,800 19,300 Useful life (years)6 Market value (end of 25,00040,000 useful life) 1999, A 19.9%, B 15.65%, O 15.65%, B O Neither

Explanation / Answer

Cost for Option A in year 6 3800 (28800-25000) Annualexpense of Option A fromyear 7 through 9 94800 (66000+28800) Cost for Option B in year 9(terminal year) -20700 (19300-40000) MARR=15% N Year 0 1 2 3 4 5 6 7 8 9 A Annual Cost for option A $272,000 $28,800 $28,800 $28,800 $28,800 $28,800 $3,800 $94,800 $94,800 $94,800 B Annual Cost for option B $346,000 $19,300 $19,300 $19,300 $19,300 $19,300 $19,300 $19,300 $19,300 ($20,700) C=A-B Incremental Cash Flow ($74,000) $9,500 $9,500 $9,500 $9,500 $9,500 ($15,500) $75,500 $75,500 $115,500 Present Value (PV) of Cash Flow: (Cash Flow)/((1+i)^N) i=Discount Rate=MARR=15%=0.15 N=Year of Cash Flow Future Value (FV) of Cash Flow in year 9 (Cash Flow)*((1+i)^(9-N)) i=Discount Rate=MARR=15%=0.15 N=Year of Cash Flow All incremental cash outflows are discounted to year 0(PV) All incremental cash inflows are compounded to year 9(FV) SUM D=C/(1.15^N) Present Value of incrementl Cash Outflows ($74,000) $       (6,701) ($80,701) SUM E=C*(1.15^(9-N)) Future value of incremental Cash inflows $           29,061 $ 25,270 $ 21,974 $ 19,108 $ 16,616 $ 99,849 $ 86,825 $      115,500 $ 414,202 External Rate of Return =R 80701*((1+R)^9)=414202 (1+R)^9=414202/80701=             5.13 1+R=5.13^(1/9)= 1.1992946 R=1.1992946-1= 0.1992946 Incremental ERR=ExternalRate of return= 19.9% Incremental ERR of both alternatives= 19.9%

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