PART 1

you are the owner of a construction company and must decide the best strategy for providing crane services over the next 5 years. You currently own 40-ton crane which has a current maker value of $200,000. If you choose to keep the existing crane, you will have to immediately invest %200,000 for repairs to ensure it will last 5 years where it will have zero salvage value. If you choose to purchase a new crane, assume that you can sell the full market value of existing equipment ($200,000) the following tables present two feasible options and associated cost disregard the effects of taxes, depreciation and inflation. MARR=10%

Items	Opt 1 keep existing	Opt 2 purchase new
Initial cost	$200,000(repair)	$750,000
O&M per year	$7,500	$5,000
Daily operation expenses	$600/day	$300/day
Salvage value	$0	$200,000

Find :

A. number of crane operating day/year required to be indifferent(breakeven) between choosing either option 1 or option 2

B. the best option if yopu are predicting a need for at least 150 crane operating days per year over the next five years. Explain

Part 2.

Use the cost information for each option listed in problem 1. You also estimate that the average daily revenues are 20k./day for each day the crane is operating. For the purpose of this analysis assume that the crane will operate 150 days/yr for the next5 years. CORPORATE TAX RATE = 40% MARRat = 10% and use MACRS-GDS 5 yr. property classification for the for depreciation allowance. Assume that the existing crane has been fully depreciated prior to this analysis and ignore inflation effects.

Find:

a. after tax cash flow for each option

B. after tax present worth of each option and your choice for crane services

PART 3.

Considering parts 1 and 2 and the uncertaintly regarding the number of crane operating days per year. You wish to conduct a before tax risk analysis of option 1 only(keeping existing crane) your initial estimates revenue and cost per day of operating remain $20,000/day and $600/day, respectively however, the following is discrete probability distribution of the number of crane-days/yrs. Based on historical data.

Probability distribution
Probability	Crane-days/yr
0.2	100
0.3	125
0.2	150
0.2	160
0.1	170

Find:

A. expected value of annual cash flow, E(A)

b. variance of annual cash flow V(A)

c. expected value of before=tax present worth for 5 years if crane service E(PW)

D. probability that before-tax PW will exceed $10.0M after 5 years of crane service.