Question
Two different alternatives are being considered for the purchase of an excavator for a heavy/civil contractor. The small excavator is less expensive to maintain, but
Two different alternatives are being considered for the purchase of an excavator for a heavy/civil contractor. The small excavator is less expensive to maintain, but is not as productive so does not earn as much income as the more expensive machine. The company uses a MARR of 10% per year on all purchase decisions for equipment. The cost data for the two machines are presented in the table below:
Large Excavator | Small Excavator | |
Initial Cost to Purchase | $140,000 | $80,000 |
Annual Maintenance Cost | $5,000/year | $4,000/year |
Annual Gross Income | $45,000/year | $30,000/year |
Salvage Value | $20,000 | $10,000 |
Expected Lifespan | 9 years | 9 years |
a) Using a present worth analysis method (NPV), which alternative appears to be the best choice for the contractor?
b) Calculate the rate of return (ROR) for each of the two alternatives listed above. Based on the ROR analysis, which alternative appears to be the best choice fot the contractor?
c) Calculate an incremental rate of return (IROR) for these two alternatives. On the basis of this IROR analysis, which alternative appears to be the better choice for this contractor?
d) Based on all three of these analyses (NPV, ROR, and IROR), make a final determination of which excavator this contractor should purchase. Why did you make the selection you did?
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