An engineer must decide between two ways to pump concrete to the top of a seven-
ID: 367088 • Letter: A
Question
An engineer must decide between two ways to pump concrete to the top of a seven-story building. Plan 1 requires the leasing of equipment for $60000 initially and will cost between $0.40 and $0.95 per metric ton to operate, with a most likely cost of $0.50 per metric ton. The pumper is able to deliver 100 metric tons per 8-hour a day. If leased, the asset will have a contract period of 5 years. Plan 2 is rental option that will cost $15000 per year. In addition, an extra $15 per hour labor cost will be incurred for operating the rented equipment per 8-hour day. Which plan should the engineer recommended if the equipment will be needed for 50 days per year? The MARR is 12% per year.
Explanation / Answer
Plan 1:
Leasing cost - 60,000
Total cost of delivering concrete in a year = .5*100*50 = 2500
Total cost for Plan 1 = 62,500
But the contract is valied for 5 years
Plan 2:
Rental option - 15000
Extra labour cost = 8*15*50 = 6000
Per year cost = 21000
It is better to go with Plan 1 since Plan 2 cost is higher if calculated for 5 years.
In plan 1 the cost of pumping concrete which comes out to be 2500 is the extra cost required per year.
So in 5 years the total cost in Plan 1 would be = 60,000 + 2500*5 = 72500
In plan 2 the total cost in 5 years is 21000*5 = 105,000
Better plan is Plan 1