2.2 Part 2: Purchase of excavators The company is considering to purchase construction plant for use on construction projects. The details of three options are as follows: Option 1 Buy two large excavators with expected income and expenditure cashflows as follows: 0 1 2 3 4 5 6 7 Year Income 8 R70 000 0 R50 000 R50 000 | R50 000 | R50 000 R70 000 R70 000 R70 000 Year 0 5 6 7 1 R25 000 2 3 4 R27 000 R30 000 R33 000 8 R45 000 Expenditure 0 R36 000 R38 000 R40 000 Option 2 Buy two medium sized excavators and a tipper truck with expected income and expenditure cashflows as follows: Year 0 4 5 6 7 8 9 R70 000 Income 0 R60 000 R91 000 R91 000 R70 000 R70 000 1 R60 000 1 R22 000 2 R60 000 2 R24 000 3 R60 000 3 R30 000 7 8 Year 0 Expenditure 0 4 R33 000 5 R36 000 6 R38 000 9 R55 000 R55 000 R55 000 Option 3 Buy a large excavator and two tipper trucks with expected income and expenditure cashflows as follows: Year 0 1 2 3 4 5 6 7 8 9 0 R72 000 R70 000 R72 000 R72 000 R118 300 R118 300 R65 000 Income Year 0 10 R70 000 10 R54 000 3 4 5 6 1 R22 000 2 R24 000 R65 000 8 R48 000 7 R55 000 R70 000 9 R49 000 Expenditure 0 R28 000 R33 000 R 36 000 R 38 000 10 R70 000 10 R55 000 Determine the NPV of each of the three options and recommend an option for implementation. As a means to check your calculations, use the following three methods for calculating the NPV for each of the options: NPV option to calculate the AE in the Constant Rand Domain Change cash flow option to calculate the AE in the constant Rand domain FV option to calculate the AE in the Constant Rand domain Assume i = 10% and f = 6% Clearly show the calculations for all three methods. 2.2 Part 2: Purchase of excavators The company is considering to purchase construction plant for use on construction projects. The details of three options are as follows: Option 1 Buy two large excavators with expected income and expenditure cashflows as follows: 0 1 2 3 4 5 6 7 Year Income 8 R70 000 0 R50 000 R50 000 | R50 000 | R50 000 R70 000 R70 000 R70 000 Year 0 5 6 7 1 R25 000 2 3 4 R27 000 R30 000 R33 000 8 R45 000 Expenditure 0 R36 000 R38 000 R40 000 Option 2 Buy two medium sized excavators and a tipper truck with expected income and expenditure cashflows as follows: Year 0 4 5 6 7 8 9 R70 000 Income 0 R60 000 R91 000 R91 000 R70 000 R70 000 1 R60 000 1 R22 000 2 R60 000 2 R24 000 3 R60 000 3 R30 000 7 8 Year 0 Expenditure 0 4 R33 000 5 R36 000 6 R38 000 9 R55 000 R55 000 R55 000 Option 3 Buy a large excavator and two tipper trucks with expected income and expenditure cashflows as follows: Year 0 1 2 3 4 5 6 7 8 9 0 R72 000 R70 000 R72 000 R72 000 R118 300 R118 300 R65 000 Income Year 0 10 R70 000 10 R54 000 3 4 5 6 1 R22 000 2 R24 000 R65 000 8 R48 000 7 R55 000 R70 000 9 R49 000 Expenditure 0 R28 000 R33 000 R 36 000 R 38 000 10 R70 000 10 R55 000 Determine the NPV of each of the three options and recommend an option for implementation. As a means to check your calculations, use the following three methods for calculating the NPV for each of the options: NPV option to calculate the AE in the Constant Rand Domain Change cash flow option to calculate the AE in the constant Rand domain FV option to calculate the AE in the Constant Rand domain Assume i = 10% and f = 6% Clearly show the calculations for all three methods
