An equipment rental firm purchased a new scissor lift to add to its rental fleet
ID: 1201114 • Letter: A
Question
An equipment rental firm purchased a new scissor lift to add to its rental fleet. The scissor lift cost $21,000 and is expected to have a useful life of 4 years. The salvage value at the end of the lift's useful life is estiamted to be $1,000. Maintenance and ownership costs for the lift are estimated to be $5 per hour rented, and the lift is expected to rented for 800 hours per year. Using an MARR of 7%, determine the lowest rental rate that the company should use. Express your answer in $/hr to the nearest cent.
Answer is 12.47 to check your work. Show all equations to receive positive feedback.
Explanation / Answer
Cash inflow, years 1 to 4 = $5 x 800 = $4,000 per year
Present worth of costs, PW ($) = 21,000 + 4,000 x PVIFA(7%, 4) - 1,000 x PVIF(7%, 4)
= 21,000 + 4,000 x 3.3872 - 1,000 x 0.7629 = 21,000 + 13,548.8 - 762.9 = 33,785.9
Equivalent Annual woth (EAW) of this amount ($) = 33,785.9 / PVIFA(7%, 4) = 33,785.9 / 3.3872
= 9,974.32
This EAW must be spread over 900 hours a year. So,
Annual rental rate = $9.974.32 / 800 = $12.47