Please answer it correctly, do not answer it if you don’t know or not sure A con
ID: 328663 • Letter: P
Question
Please answer it correctly, do not answer it if you don’t know or not sure A contractor must choose between buying or renting a crane for the duration of a 3 year construction project. The contractor uses an MARR of 8%. The crane costs $620,000 and can be sold for $390,000 after 3 years. The cost to operate and maintain the crane is $220,000 per year. Renting the crane costs $330,000 per year including all operating and maintenance costs. Determine the incremental benefit- cost ratio that the contractor should use to decide between buying and renting. Express your answer to two decimal places.Explanation / Answer
(Costs are represented with negative sign, income with positive sign, hence salvage value is positive rest all negative)
Buying:
R = 8%
initial cost (I) = - 620000
Salvage value (S) = 390000
cost for year 1 = - 220000
cost for year 2 = - 220000
cost for year 3 = - 220000 + salvage value = - 220000 + 390000 = 170000
NPV = (C for Period 1 / (1 + R)1) + (C for Period 2 / (1 + R)2) ... (C for Period x / (1 + R)x) - Initial Investment
NPV = cost for year 1/(1+R) + cost for year 2/(1 + R)2 + cost of year 3/(1 + R)3 - I
NPV = - 220000/(1+8%) - 220000/(1+8%)2 + 170000/(1+8%)3 - 620000
NPV = - 208703.7 - 188614.5 + 134951.5 - 620000
NPV = - 882366.7
Renting:
Cost for 1st, 2nd and 3rd year = 330000
NPV = - 330000/(1+8%) - 330000/(1+8%)2 - 330000/(1+8%)3
NPV = - 305555.6 - 282921.8 - 261964.6
NPV = - 850442
Renting has a better NPV than buying.
incremental benefit cost ratio = NPV of Renting/NPV of Buying
= - 850442/ - 882366.7
= 0.964
Hence Renting should be chosen.