A contractor must choose between buying or renting a crane for the duration of a
ID: 2757278 • Letter: A
Question
A contractor must choose between buying or renting a crane for the duration of a 5 year construction project. The contractor uses an MARR of 8%. The crane costs $590,000 and can be sold for $350,000 after 5 years. The cost to operate and maintain the crane is $230,000 per year. Renting the crane costs $340,000 per year including all operating and maintenance costs.
A. Determine the future worth of costs (FWC) for the contractor's best option. Express your answer as a positive number is $ to the nearest $1,000.
B. Determine the incremental benefit-cost ratio that the contractor should use to decide between buying and renting. Express your answer to two decimal places.
The answer to part A is 1866222, just a good explanation. (Preferably formulas, not excel)
Not sure what part B answer is.
Explanation / Answer
NPV of Buying crane option
($)
Year
Particulars
Amount
P.V Factor @ 8%
Total
0
Initial investment
5,90,000
1
590000.00
1
operating and maintenance costs.
2,30,000
0.925925926
212962.96
2
operating and maintenance costs.
2,30,000
0.85733882
197187.93
3
operating and maintenance costs.
2,30,000
0.793832241
182581.42
4
operating and maintenance costs.
2,30,000
0.735029853
169056.87
5
operating and maintenance costs.
2,30,000
0.680583197
156534.14
5
Salvage value
-3,50,000
0.680583197
-238204.12
NPV
1270119.19
NPV of Renting crane option
($)
Year
Particulars
Amount
P.V Factor @ 8%
Total
1
operating and maintenance costs.
3,40,000
0.925925926
314814.81
2
operating and maintenance costs.
3,40,000
0.85733882
291495.20
3
operating and maintenance costs.
3,40,000
0.793832241
269902.96
4
operating and maintenance costs.
3,40,000
0.735029853
249910.15
5
operating and maintenance costs.
3,40,000
0.680583197
231398.29
NPV
1357521.41
B.
Present value of Incremental benefit
($)
Year
Particulars
Amount
P.V Factor @ 8%
Total
1
Incremental Saving in operating costs.
1,10,000
0.925925926
101851.85
2
Incremental Saving in operating costs.
1,10,000
0.85733882
94307.27
3
Incremental Saving in operating costs.
1,10,000
0.793832241
87321.55
4
Incremental Saving in operating costs.
1,10,000
0.735029853
80853.28
5
Incremental Saving in operating costs.
1,10,000
0.680583197
74864.15
5
Salvage value
3,50,000
0.680583197
238204.12
NPV
677402.22
Present value of Operating exp
($)
Year
Particulars
Amount
P.V Factor @ 8%
Total
1
Operating exps
2,30,000
0.925925926
212962.96
2
Operating exps
2,30,000
0.85733882
197187.93
3
Operating exps
2,30,000
0.793832241
182581.42
4
Operating exps
2,30,000
0.735029853
169056.87
5
Operating exps
2,30,000
0.680583197
156534.14
NPV
918323.31
B/C Ratio = Present value of benefits/Initial investment+Present value of operating and maintenance exp.
= 677402.22 /5,90,000 + 918323.31
= 0.449109431
NPV of Buying crane option
($)
Year
Particulars
Amount
P.V Factor @ 8%
Total
0
Initial investment
5,90,000
1
590000.00
1
operating and maintenance costs.
2,30,000
0.925925926
212962.96
2
operating and maintenance costs.
2,30,000
0.85733882
197187.93
3
operating and maintenance costs.
2,30,000
0.793832241
182581.42
4
operating and maintenance costs.
2,30,000
0.735029853
169056.87
5
operating and maintenance costs.
2,30,000
0.680583197
156534.14
5
Salvage value
-3,50,000
0.680583197
-238204.12
NPV
1270119.19
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