The Stark County executives are considering the purchase of new 130 hp bulldozer

Question

The Stark County executives are considering the purchase of new 130 hp bulldozer and are comparing two models: the BEHEMOTH and the GOLIATH. The BEHEMOTH bulldozer costs $130,000, with a projected annual operating and maintenance cost of $31,000 and a salvage value $15,000 after 7 years. The GOLIATH model costs $175,000, with a projected annual operating and maintenance cost of $22,000 and a salvage value of $21,000 after 7 years.

Calculate the net present value of the BEHEMOTH compressor and the net present value of the GOLIATH compressor, with the cash flows discounted annually at 12%. Which model should be purchased?

Explanation / Answer

BEHEMOTH:

Initial Cost = $130,000
Annual Cost = $31,000
Salvage Value = $15,000
Life of Project = 7 years

NPV = -$130,000 - $31,000 * PVIFA(12%, 7) + $15,000 * PVIF(12%, 7)
NPV = -$130,000 - $31,000 * 4.5638 + $15,000 * 0.4523
NPV = -$264,693.30

GOLIATH:

Initial Cost = $175,000
Annual Cost = $22,000
Salvage Value = $21,000
Life of Project = 7 years

NPV = -$175,000 - $22,000 * PVIFA(12%, 7) + $21,000 * PVIF(12%, 7)
NPV = -$175,000 - $22,000 * 4.5638 + $21,000 * 0.4523
NPV = -$265,905.30

The company should choose neither of the project since both will incur enormous loss.

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