As the supervisor of a facilities engineering department, you consider mobile cr
ID: 2765142 • Letter: A
Question
As the supervisor of a facilities engineering department, you consider mobile cranes to be critical equipment. The purchase of a new, medium-sized, truck-mounted crane is being evaluated. The economic estimates for the two best alternatives are shown in the accompanying table. You have selected the longest useful life (9 years) for the study period, and would lease a crane for the final three years under Alternative A. Under Alternative C, a crane would leased for the entire nine years. Based on previous experience, the estimated annual leasing cost will be $66,000 per year fin additional to the annual expenses of $28,800). The MARR is 15% per year. Which crane should be selected, using external rate of return? Be sure to indicate the "winning" external rate of return or incremental external rate of return. Alternative A Alternative B. Alternative C None of the aboveExplanation / Answer
Alternative A:
Year
Cash flows
Discounting
factor @15%
Discounted
Cash flows
0
$ 272,000
1
$ 272,000.00
1
$ 94,800
0.86957
$ 82,435.24
2
$ 94,800
0.75614
$ 71,682.07
3
$ 94,800
0.65752
$ 62,332.90
4
$ 94,800
0.57175
$ 54,201.90
5
$ 94,800
0.49718
$ 47,132.66
6
$ 69,800
0.43233
$ 30,176.63
Total cash flows
$ 619,961.40
Per year expenses = $619,961.40 /4.78449
= $129,577
Alternative B:
Year
Cash flows
Discounting
factor @15%
Discounted
Cash flows
0
$ 346,000
1
$ 346,000.00
1
$ 19,300
0.86957
$ 16,782.70
2
$ 19,300
0.75614
$ 14,593.50
3
$ 19,300
0.65752
$ 12,690.14
4
$ 19,300
0.57175
$ 11,034.78
5
$ 19,300
0.49718
$ 9,595.57
6
$ 19,300
0.43233
$ 8,343.97
7
$ 19,300
0.37594
$ 7,255.64
8
$ 19,300
0.3269
$ 6,309.17
9
$ (20,700)
0.28426
$ (5,884.18)
Total cash flows
$ 426,721.29
Per year expenses = $426,721.29 / 5.77159
= $73,934.80
Alternative C:
Year
Cash flows
Discounting
factor @15%
Discounted
Cash flows
1
$ 94,800
0.86957
$ 82,435.24
2
$ 94,800
0.75614
$ 71,682.07
3
$ 94,800
0.65752
$ 62,332.90
4
$ 94,800
0.57175
$ 54,201.90
5
$ 94,800
0.49718
$ 47,132.66
6
$ 94,800
0.43233
$ 40,984.88
7
$ 94,800
0.37594
$ 35,639.11
8
$ 94,800
0.3269
$ 30,990.12
9
$ 94,800
0.28426
$ 26,947.85
Total cash flows
$ 452,346.73
Per year expenses = $452,346.73 / 4.77159
= $94,800
Therefore, the correct answer is Alternative B because it has yearly maintenance expenses are $73,934.80 low compared other alternatives A and C.
Year
Cash flows
Discounting
factor @15%
Discounted
Cash flows
0
$ 272,000
1
$ 272,000.00
1
$ 94,800
0.86957
$ 82,435.24
2
$ 94,800
0.75614
$ 71,682.07
3
$ 94,800
0.65752
$ 62,332.90
4
$ 94,800
0.57175
$ 54,201.90
5
$ 94,800
0.49718
$ 47,132.66
6
$ 69,800
0.43233
$ 30,176.63
Total cash flows
$ 619,961.40
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