A contractor wants to purchase a piece of equipment over a period of 7 years. The vehicle is fully tracked, and no tires are required. The purchase price of the equipment is 675 thousand dollars. The company's internal interest rate is 7%. It is estimated that the machine will be operated 1200 hours per year. The salvage value at 7 years will be 10% of the purchase price. The vehicle will require major maintenance every 2400 hours of operation, and a cost of $15,000. It will require an overhaul every 3600 hours at a cost of $47,000.

Compute the hourly rate that the company must charge in order to recover its capital and investment.

Repeat example 1 assuming that the salvage value at 6 years is 12 percent of the purchase price. Is it better to operate for 6 or 7 years? Why?