A general contractor is buying construction equipment for grading with a purchas
ID: 348552 • Letter: A
Question
A general contractor is buying construction equipment for grading with a purchase price of $140,000. The salvage price after 5 years is $16,000. The expected monthly benefit is $3,400. The dealership offered him to buy additional equipment with a total discount of 10% for both equipment purchase price. The salvage price of the second equipment is same as that for the first equipment. The expected monthly benefit of the second equipment is $2,380, The cost of the loan to buy the equipment is 4.5% while the MARR is equal to 6%. Since the contractor needs at least one equipment, advise the contractor to buy/not to buy the second equipment.Explanation / Answer
Comparing present worth for cashflows from option A and option B individually:
Option A:
Present worth = Initial investment + salvage value + monthly benefits
Present worth @ Cost of loan = -140000+16000/(1+0.00375)^60+3400*((1+0.00375)^60-1)/(0.00375*(1+0.00375)^60)
= $55,156
Present worth @ MARR = -140000+16000/(1+0.005)^60+3400*((1+0.005)^60-1)/(0.005*(1+0.005)^60)
= $47,729
Option B:
Present worth = Initial investment + salvage value + monthly benefits
Present worth @ Cost of loan = -252000+32000/(1+0.00375)^60+5780*((1+0.00375)^60-1)/(0.00375*(1+0.00375)^60)
= $83,599
Present worth @MARR = -252000+32000/(1+0.005)^60+5780*((1+0.005)^60-1)/(0.005*(1+0.005)^60)
= $70,698
Thus buying 2 equipments has higher value with the discount provided.
Data points Eqp1 (A) Eqp1 + Eqp 2 (B) Buy price 140000 252000 Salvage value 16000 32000 Monthly benefit 3400 5780 Cost of loan 4.50% 4.50% Monthly cost of loan 0.375% 0.375% MARR 6% 6% Monthly MARR 0.5% 0.5%Related Questions
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