Question 2 (20 Marks)

An irrigation canal contractor wants to determine whether he should purchase a used Caterpillar mini excavator, or a Toro powered rotary tiller for servicing irrigation ditches in an agricultural area of California. The initial cost of the excavator is $20,000 with a $10,000 salvage value after 10 years. Fixed costs for insurance, license, etc. are expected to be $15,000 per year. The excavator will require one operator at $13 per hour and maintenance at $2 per hour. In 1 hour,

0.15 mile of ditch can be prepared. Alternatively, the contractor can purchase a tiller and hire 10 workers at $2.00 per hour each. The tiller costs $5,000 and has a useful life of 5 years with no salvage value. Its operating cost is expected to be $4 per hour, and with the tiller, the 10 workers can prepare 0.04 mile of ditch in 1 hour. The contractors MARR is 10% per year.

1. Determine the number of miles of ditch per year the contractor would have to service for the two options to breakeven (15 marks).
2. If the company expects to prepare 45.2 miles per year, which equipment should the company purchase? (5 marks)