Question 1 1 pts The economic estimates for two cranes are shown in the table be

Question

Question 1 1 pts The economic estimates for two cranes are shown in the table below. The study period is nine years. For the case of alternative A, you would have to lease a crane for the final three years. Annual leasing costs will be $66.000 per year (plus the annual expenses of $28.800 per yearl The MARRIS 15% per year, hat is the incremental ERR (delta ERR) for both alternatives? Which alternative should be selected? (Hint: You must purchase a crane, do nothing is not an option) A. Capital investment $272,000 $346,000 Annual expenses 28,800 19,300 Useful life (vears)6 Market value (end of 25,00040,000 useful life) 19.9%, A 19.9%, 15.65% A 15.65%, B O Neither

Explanation / Answer

A

B

Incremental
Cash Flow of A-B

Capital Investment

272000

346000

-74000

Annual Expenses

1

28800

19300

9500

2

28800

19300

9500

3

28800

19300

9500

4

28800

19300

9500

5

28800

19300

9500

6

28800

19300

9500

7

28800+66000=94800

19300

75500

8

28800+66000=94800

19300

75500

9

28800+66000=94800

19300

75500

Salvage Value

25000

40000

-15000

MARR = 15%

Study Period = 9 years

What is the ERR?

Present Worth of outflows = -74000 – 15,000 (P/F, 15%, 9)

Present Worth of outflows = -74000 – 15,000 (.2843) = -78264 (Take 78264)

FW of outflows = 9500 (F/A, 15%, 6) (F/P, 15%, 3) + 75500 (F/A, 15%, 3)

FW of outflows = 9500 (8.754) (1.521) + 75500 (3.473) = 388702

78264 (1+i) 9 = 388702

(1+i) 9 = 388702 ÷ 78264

(1+i) 9 = 4.96 (take 5)

(1+i) = 1.1958

I = 1 – 1.1958

I = .1958 or 19.58%

ERR (19.58%) > MARR – Select Alternative A

Answer is close to Option A – 19.9%, Alternative A

A

B

Incremental
Cash Flow of A-B

Capital Investment

272000

346000

-74000

Annual Expenses

1

28800

19300

9500

2

28800

19300

9500

3

28800

19300

9500

4

28800

19300

9500

5

28800

19300

9500

6

28800

19300

9500

7

28800+66000=94800

19300

75500

8

28800+66000=94800

19300

75500

9

28800+66000=94800

19300

75500

Salvage Value

25000

40000

-15000

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