3. Evaluating Alternatives

You are the owner of a small earthwork construction firm and you own two scrapers. You are considering the purchase of a new scraper. Your current scraper earns you $23,000 per year and has a yearly maintenance cost of $4,100 that is increasing by $1,095 per year. The salvage value is $45,000 but that value is decreasing by $4,000 per year. You have paid off your current scraper.

Choice#1: The first new model has a cost of $195,000, is capable of earning you $55,000 per year, and has a yearly maintenance cost of $5,100, which increases by $740 every year thereafter. The salvage value for this machine is $180,000, which decreases by $18,000 every year thereafter.

Choice#2: The second model has a cost of $170,000, is capable of earning $45,000 per year, and has a yearly maintenance cost of $4,000 that increases by $950 per year thereafter. The salvage value for this machine is $158,000, which decreases in value by $14,000 each year thereafter.

If you plan to have whatever scraper you purchase for a 6-year period, which choice (current, choice#1, choice#2) is optimal? Assume a 4% APR compounded yearly