Can you help me with this problem? Pretty Boy Construction Inc. wants to purchas
ID: 1189885 • Letter: C
Question
Can you help me with this problem?
Pretty Boy Construction Inc. wants to purchase one of 2 dozers. Their cost data is summarized below.
Dozer A
Dozer B
Price/First Cost/Capital Cost
$540,000
$608,000
Annual Maintenance Cost
$2,800
$1,600
Refurbishment Cost
$150,000 in Year 7
$175,000 in year 9
Expected Life, years
10
12
Salvage Value
$54,000
$77,000
Assuming an interest rate of 8% per annum, which dozer would you advice the Manager of Pretty Boy to purchase? Use the net annual worth/value method.
Dozer A
Dozer B
Price/First Cost/Capital Cost
$540,000
$608,000
Annual Maintenance Cost
$2,800
$1,600
Refurbishment Cost
$150,000 in Year 7
$175,000 in year 9
Expected Life, years
10
12
Salvage Value
$54,000
$77,000
Explanation / Answer
Dozer A
Net Annual Worth for investment=(Price-Salvage value)/Annuity factor(8% for 10 years)
Net Annual Worth for investment=(540000-54000)/6.71=72429.21
Net Annual worth for refurbishment cost=x
X*FV Factor(8% for 7 years)+X*Annuity factor(8% for 3 years)=150000
X*8.923+X*2.723=150000
X=12886.6
Net Annual worth= Net Annual Worth for investment+ Net Annual worth for refurbishment cost+ Annual Maintenance Cost
Net Annual worth =72429.21+2800+12886.6=88115.81
Dozer B
Net Annual Worth for investment=(Price-Salvage value)/Annuity factor(8% for 12 years)
Net Annual Worth for investment=(608000-77000)/7.536=70461.78
Net Annual worth for refurbishment cost=x
X*FV Factor(8% for 9 years)+X*Annuity factor(8% for 3 years)=175000
X*12.488+X*2.723=175000
X=11504.83203
Net Annual worth= Net Annual Worth for investment+ Net Annual worth for refurbishment cost+ Annual Maintenance Cost
Net Annual worth =70461.78+1600+11504.832=83566.61
Since Dozer B has less Net Annual Worth, Thus the Manager should buy Dozer B