3. (5 pts) A construction company purchased a bulldozer 8 years ago for $220K. I
ID: 1116022 • Letter: 3
Question
3. (5 pts) A construction company purchased a bulldozer 8 years ago for $220K. It has been depreciated to a book value of S55K. The Caterpillar Company salesman has proposed replacing it with a new model for $270K and taking the present bulldozer in trade for $65K. It is estimated the current bulldozer will last 3 more years with an annual O&M; of S9K/year and can be sold then for $11K. The salesman claims the new bulldozer is much more reliable and will only have O&M; costs of $4K/year, last 1 5 years and still be salvaged for S10K. Company MARR is 8%. Is this a transaction that should be made this year?Explanation / Answer
Data for the old bulldozer
Present worth = $ 65,000
Operating cost for next 3 years = $ 9000
Salvage value after 3 years = $ 11,000
The annual equivalent cost of the present machine = ( $ 65,000 - $ 11,000) (A/P , 8% , 3 years) + $ 11,000 x 0.08 + $ 9000
Annual equivalent cost of the present machine = $ 54,000 * 0.388034 + $ 880 + $ 9000
Annual equivalent cost of the present machine = $ 30,834
Data for new bulldozer
Initial cost = $ 270,000
Operating cost / year = $ 4000
Salvage value 15 years from now = $ 10,000
Equivalent annual cost for new bulldozer = ( $ 270,000 - $ 10,000) ( A/P , 8% , 15 years) + $ 10,000 x 0.08 + $ 4000
Equivalent annual cost for new bulldozer = $ 260,000 x 0.116830 + $ 800 + $ 4000
Equivalent annual cost for new bulldozer = $ 35,175.80
_______________________________________________________
The equivalent annual cost of old bull dozer is less than that of new bulldozer . Hence the old bulldozer should not be replaced now
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