Chapter 07, Problem 009 Allen Construction purchased a crane 6 years ago for $13

Question

Chapter 07, Problem 009 Allen Construction purchased a crane 6 years ago for $130,000. They need a crane of this capacity for the next 5 years. Normal operation costs $35,000 per year. The current crane will have no salvage value at the end of 5 more years. Allen can trade in the current crane for its market value of $40,000 toward the purchase of a new one, which costs $150,000. The new crane will cost only $8,000 per year under normal operating conditions and will have a salvage value of $55,000 after 5 years. If MARR is 20%, determine which option is preferred. Click here to access the TVM Factor Table Calculator Use the cash flow approach (insider's viewpoint approach) Show the EUAC values used to make your decision: Keep existing crane Keep existing crane: $ Replace with new crane:$ Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is ±10 Preferred option? Use the opportunity cost approach (outsider's viewpoint approach) Show the EUAC values used to make your decision: Keep existing crane:$ Replace with new crane:$ Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is ±10 Preferred option?

Explanation / Answer

Cash Flow Approach Calculation of cash flow Particular Old Machine New Machine Inflow of cash $40,000 $40,000 Less: Running Expenses $35,000 $8,000 Net Cash inflow $5,000 $32,000 Hence , Allen constructions should ho for new machine , because new machine,s net cash flow is more Opportunity cost approach Particular Old Machine New Machine Cost of machine 130000 Less: machine used previous years 70909 59091 $130000/11years*6years Cost of new machine 150000 Less: scrap value 55000 95000 Running cost per year 35000 8000 PVIFA,0.20,5 2.9906 2.9906 Present value of running cost 104671 23924.8 Total outflow 163762 118924.8 (Value of machine+Pvof Running cost) Annual outflow(Total outflow/PVIFA,0.20,5) 54758.91126 39766.20076 Hence, Allen Construction should opt new machine because its annual out flow is less than old machine

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