The Stark County executives are considering the purchase of new 130 hp bulldozer
ID: 427228 • Letter: T
Question
The Stark County executives are considering the purchase of new 130 hp bulldozer and are comparing two models: the BEHEMOTH and the GOLIATH. The BEHEMOTH bulldozer costs $130,000, with a projected annual operating and maintenance cost of $31,000 and a salvage value $15,000 after 7 years. The GOLIATH model costs $175,000, with a projected annual operating and maintenance cost of $22,000 and a salvage value of $21,000 after 7 years.
Calculate the net present value of the BEHEMOTH compressor and the net present value of the GOLIATH compressor, with the cash flows discounted annually at 12%. Which model should be purchased?
Explanation / Answer
R = 12%
Time n = 7 years
Net present value = initial investment + present value of O&M cost – present value of the salvage benefits
For BEHEMOTH bulldozer:
Net present value = 130000 + 31000*(1-1/1.12^7)/.12 - 15000/1.12^7
Net present value = $264691.2
For GOLIATH bulldozer:
Net present value = 175000 + 22000*(1-1/1.12^7)/.12 - 21000/1.12^7
Net present value = $265903.3
Since BEHEMOTH model has relatively lower net present worth of the cost of the given two models, then BEHEMOTH model should be selected for purchase.