Question
A company wants to start an excavation business in gypsum mining. If a single front-shovel is used, it is estimated that the excavation of the
A company wants to start an excavation business in gypsum mining. If a single front-shovel is used, it is estimated that the excavation of the existing deposits will take 11 years. The idea is to purchase a front-shovel and to rent it to another company that will carry out the actual job. The company, therefore, draws a plan according to which the company purchases a front-shovel for $62,000. This front-shovel has a useful life of 5 years with no salvage value at the end of its life. Some major repair amounting to $6,000 is anticipated for the end of the third year. The company expects to receive a rental of $18,000 per year.
At the end of the five-year period, the company plans to discard the existing front-shovel and to purchase a new front-shovel for $80,000. This front-shovel is expected to have a useful life of 6 years with no salvage value at the end of its life. Some repair work is expected to take place at the end of the third year of its life; the repair is anticipated to cost $8,000. The company expects to get a rental of $20,000 per year for this machine.
The interest rate in the first 5 years is expected to be 10%, whereas it is expected to increase to 12% in the remaining 6 years. Is this a profitable venture? Compare the equivalent incomes and expenditures:
a) At the end of five years
b) At the present time
c) At the end of 11 years.
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