Question

In: Economics

If Bob buys a backhoe for $100,000, which has a maintenance cost of $2000/yr that will...

If Bob buys a backhoe for $100,000, which has a maintenance cost of $2000/yr that will increase $1,000 per year after year 5, has a required rebuild of its hydraulic system at year 6 that costs $12,000, and then he sells it for $20,000 after 10 years, what is the life cycle cost of his backhoe if the interest rate is 3% per year. PLEASE INCLUDE A CASH FLOW DIAGRAM or I will not rate!! Thank you.

Solutions

Expert Solution

Using Excel

Year Initial cost Rebuild req Annual cost Resale value Net Cash flow Discount factor Present value
0 -100000 -100000 1.00000 -100000.00
1 -2000 -2000 0.97087 -1941.75
2 -2000 -2000 0.94260 -1885.19
3 -2000 -2000 0.91514 -1830.28
4 -2000 -2000 0.88849 -1776.97
5 -2000 -2000 0.86261 -1725.22
6 -12000 -3000 -15000 0.83748 -12562.26
7 -4000 -4000 0.81309 -3252.37
8 -5000 -5000 0.78941 -3947.05
9 -6000 -6000 0.76642 -4598.50
10 -7000 20000 13000 0.74409 9673.22
Present value -123846.37

Life cycle cost = 123846

Cash Flow diagram

Showing formula in excel

Year Initial cost Rebuild req Annual cost Resale value Net Cash flow Discount factor Present value
0 -100000 =B18+C18+D18+E18 =1/1.03^A18 =F18*G18
1 -2000 =B19+C19+D19+E19 =1/1.03^A19 =F19*G19
2 -2000 =B20+C20+D20+E20 =1/1.03^A20 =F20*G20
3 -2000 =B21+C21+D21+E21 =1/1.03^A21 =F21*G21
4 -2000 =B22+C22+D22+E22 =1/1.03^A22 =F22*G22
5 -2000 =B23+C23+D23+E23 =1/1.03^A23 =F23*G23
6 -12000 =D23+(-1000) =B24+C24+D24+E24 =1/1.03^A24 =F24*G24
7 =D24+(-1000) =B25+C25+D25+E25 =1/1.03^A25 =F25*G25
8 =D25+(-1000) =B26+C26+D26+E26 =1/1.03^A26 =F26*G26
9 =D26+(-1000) =B27+C27+D27+E27 =1/1.03^A27 =F27*G27
10 =D27+(-1000) 20000 =B28+C28+D28+E28 =1/1.03^A28 =F28*G28
Present value =SUM(H18:H28)

Rahul Sunny answered 1 year ago
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