A contractor is considering the purchase of a bulldozer. Two possible alternativ

Question

A contractor is considering the purchase of a bulldozer. Two possible alternative shown here, are being considered. Compare the two bulldozers based upon an equivalent uniform series and a 12 percentage rate of return Initial cost dollar 95,000 112,000 annual maintenance cost dollar 1700 dollar 2000 Annual operating cost dollar 15,000 dollar 16,000 salvage value dollar 10, 000 dollar 15,000 Life,in years 8 8. A-A-dollar 3237,B-dollar 5766 A- dollar 24,621, B-dollar 15,560 A-A- dollar 31,000, B-dollar 30,300 A-d0llar 35,011, B-dollar 39,326.

Explanation / Answer

Answer to given question:

In the given question we have to arrive Equated Annual Cost for taking the decision about the machine.

if you apply the figures in the EAC formula you will get the following results

Since the cost of Machine B is lower compared to Machine A , the contractor can purchase bulldozer B

Option Machine A Machine B Investment cost $95,000 $1,12,000 Expected lifetime 8 years 8 years Annual maintenance cost $1,700 $2,000 Annual operating cost $15,000 $16,000 Salvage value $10,000 $15,000 Rate of Return 12% 12% Equivalent annual cost $95,000/ 8 yrs 12% Present value interest factor+ $1700+$15000-$10000 $1,12,000/8yrs 12% Present value interst factor + $2000+$16000-$15000 $95,000/7.5361 +$1700+$15000-$10000 $1,12,000/7.5361+$2000+$16000-$15000 Total Cost $19305.89 $17861.79

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