Question

In: Civil Engineering

A contractor must choose between buying or renting a crane for the duration of a 5...

A contractor must choose between buying or renting a crane for the duration of a 5 year construction project. The contractor uses an MARR of 8%. At the end of the project, the crane can be sold for 26% of its initial cost. The cost to operate and maintain the crane is $210,000 per year. Renting the crane costs $330,000 per year including all operating and maintenance costs. Determine the maximum amount the contractor should pay to purchase the crane (i.e. the breakeven initial cost of the crane). Express your answer in $ to the nearest $1,000

Solutions

Expert Solution

If the contractor rents the crane, the total cost incurred every year will be calculated as follows:
Cost of rent including operation and maintenance = $330000

Total cost = $330000
Given, the MARR = 8%, we can calculate the Net present value of all these investments as:


Now, if the contractor decides to purchase the crane, let us assume the initial Purchase cost = C
Then, the salvage value = 26% of C = 0.26C at the end of the project.
Cost of operation and maintenance =. $210000 per year.
Therefore, the NPV of all the investments in this scenario will be:



Now, for break even initial cost, NPVR = NPVP
⇒ $1317594.312 = 0.823C + $838469.11
⇒ C = $582169.14 ≈ $582000

Therefore, the maximum amount that the contractor should purchase the crane in is $582000.

Thank you! Upvotes are appreciated.


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