Question

A Construction Company is reviewing four methods of acquiring golf carts for use by the Project Managers. The alternatives are: 1. Purchase the golf cart for $14,000 each. The cart is expected to have a useful life of 4 years and an estimated residual trade value of $1,250 each. 2. Lease the cart for 4 years for $4,400 per year/per cart paid in advance at the beginning of each year. (The Construction Company does not own the cart in Alternative 2) 3. Purchase the cart with $1,300 down payment and $5,200 yearly payment at the end of each year for 3 years per car. Assume the cart has an estimated residual trade value of $1,800 each. 4. Purchase the cart with one payment of $14,000. Assume no residual value for this option. If the contractor's MARR is 20%, which alternative should he choose? (Note: All alternatives involve equal lives.)

Answer 1

The Construction Company must calculate the present value of costs for each golf cart acquisition alternative using a 20% MARR to identify the best option. The option with the lowest present value is typically the most financially advantageous, but other considerations like taxes and maintenance should be factored in.

Step-by-step explanation:

The Construction Company is considering four alternatives for acquiring golf carts, each with different financial implications:

1. Purchase the golf cart outright for $14,000 with an estimated residual value of $1,250 after four years.
2. Lease the golf cart for a yearly pre-paid amount of $4,400 with no ownership at the end of the lease term.
3. Purchase the golf cart with a $1,300 down payment and subsequent annual payments of $5,200, assuming an estimated residual value of $1,800 after three years.
4. Make a one-time purchase payment of $14,000 for the golf cart, assuming no residual value at the end of its use.

To determine which alternative offers the best financial decision for the Construction Company, one must evaluate each option using the concept of the time value of money.

This involves calculating the present value of each option considering the company's minimum acceptable rate of return (MARR) of 20%. The option with the lowest present value of costs is generally the most financially viable choice. However, other factors such as tax implications, maintenance costs, and usage needs may also influence the final decision.

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