Question

Veritas Inc. has decided to acquire a new Hydraulic Excavator. It has three options. Caterpillar: purchase cost of $350,324 and operating costs of $21,964 per year (paid at the end of each year). John Deere: purchase cost of $285,068 and operating costs of $20,274 per year (paid at the end of each year). Volvo: purchase cost of $307,686 and operating costs of $15,767 per year (paid at the end of each year). Assume that Geek Inc. has a budget of $335,929 for this investment and all excavators have a service life of 12 years. Based on the defender-challenger approach and given that the MARR is 9%, reinvestment rate is 11%, and minimum external rate of return is 12%, compute the incremental Benefit-Cost ratio of choosing the best excavator (in economic terms) and then indicate your recommendation as follows: - answer “0” (without the commas) if your recommendation is the Caterpillar; - answer “1” (without the commas) if your recommendation is the John Deere; - write down as your answer the value of the incremental B-C ratio if your recommendation is Volvo. Note: round your answer to two decimal places

Answer 1

		Minimum Purchase Cost is of John Deere
		Purchase Cost	$285,068
		Next Higher Purchase Cost is ofVolvo
		Purchase Cost	$307,686
		Incremental Purchase Cost of Volvo	$22,618	(307686-285068)
	Pmt	Incremental Annual Benefit of Purchasing Volvo instead of John Deere	$4,507	(20274-15767)
	Rate	Discount Rate =MARR=	9%
	Nper	Number of years of annual benefit	12
	PV	Present Value of Benefit	$32,273
		(Using PV function of excel)
		Benefit Cost Ratio=32273/22618	1.42688959
		Benefit Cost ratio is higher than 1
		Challenger Volvo is accepted
		Now Volvo is Compared with Challenger Caterpillar
		Purchase Cost of caterpillar	$350,324
		Incremental Purchase Cost of Caterpillar	$42,638	(350324-307686)
		Incremental Annual Benefit of Purchasing Caterplillar instead of Volvo is NEGATIVE
		Caterpillar has higher cost than Budget
		Hence, Caterpillar cannot be purchased
		Recommendation:
		Purchase Volvo
		Benefit Cost ratio =	1.43