Question

Dickson Co. has asked you to help the select a backhoe. You have a choice between a wheel-mounted version which costs $50,000 and has a life of 5 yrs with a salvage value of $3,000 or a track mounted version which costs $80,000 and has a life of 8 yrs with a salvage value of $5,000. Both machines will have the same productivity and operating costs. If the MARR is 10% which machine will you recommend?

Answer 1

The wheel mounted version should be purchased because it has lower equivalent annual cost

Step-by-step explanation:

To determine which back hole is better, we will compare the the equivalent annual cost of the two and then select the lower of the two:

Equivalent annual cost = Present value of cost /Annuity factor

Present value of Wheel mounted

PV of salvage value = 3,000 × 1.1^(-5)= $1862.76

Total present value = 50,000 + $1862.76 =

Annuity factor = (1-1.1^(-5)/0.1) = 3.790786769

Equivalent annual cost =51862.76/ 3.7907 = $13,681.26

Present Value f Track mounted version =

PV of salvage value = 2,332.536901

Annuity factor =( 1-1.1^(-8)/0.1) = 5.334926

Total present value of cost = 80,000 + 2,332.536901 = 82332.5369

Equivalent annual cost =82,332.53 /5.33492=$15,432.741

Equivalent annual cost of wheel mounted =$ 13,681.26

Equivalent annual cost of track mounted=$15,432.741

The wheel mounted version should be purchased because it has lower equivalent annual cost