In: Civil Engineering
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
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.
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