Question
CBA Inc. has decided to acquire a new Machine. It has three options. M1 : purchase cost of $355,547 and operating costs of $22,644 per
CBA Inc. has decided to acquire a new Machine. It has three options.
M1: purchase cost of $355,547 and operating costs of $22,644 per year (paid at the end of each year).
M2: purchase cost of $280,640 and operating costs of $24,069 per year (paid at the end of each year).
M3: purchase cost of $318,849 and operating costs of $18,185 per year (paid at the end of each year).
Assume that this firm has a budget of $337,241 for this investment and all excavators have a service life of 12 years.
Based on the defender-challenger approach and given that the MARR is 8%, reinvestment rate is 10%, and minimum external rate of return is 11%, compute the incremental Benefit-Cost ratio of choosing the best excavator (in economic terms) and then indicate your recommendation as follows:
- answer 0 if your recommendation is M1;
- answer 1 if your recommendation is M2;
- write down as your answer the value of the incremental B-C ratio if your recommendation is M3.
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