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In: Economics

Bumps Unlimited, a highway contractor, must decide whether to overhaul a tractor and scraper or replace...

Bumps Unlimited, a highway contractor, must decide whether to overhaul a tractor and scraper or replace it. The old equipment was purchased 5 years ago for $130,000; it had a 12- year projected life. If traded for a new tractor and scraper, it can be sold for $60,000. Overhauling the equipment will cost $20,000. If overhauled, O&M cost will be $25,000/year and salvage value will be negligible in 7 years. If replaced, a new tractor and scraper can be purchased for $150,000. O&M costs will be $12,000/year. Salvage value after 7 years will be $35,000. Using a 15% MARR, should the equipment be replaced?

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Rahul Sunny answered 2 years ago
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