Question
In: Finance
A construction contractor needs to choose between two suppliers of dump trucks. Supplier 1 has an...
A construction contractor needs to choose between two suppliers of dump trucks. Supplier 1 has an initial cost of $125,000 and annual operating cost of $25, 000 per year. Supplier 2 has initial cost $160,000 and has annual operating cost of 20,000 per year. The truck fleet has the same 10-year life forecast Based on incremental rate of return (IROR) and a MARR of 8%, and which supplier of trucks should the contractor choose?
Please do not use excel.
Solutions
Expert Solution
| Calculation of Present Value of the maintaing the each truck | ||||||
| Year | Supplier 1 Truck | Supplier 2 Truck | ||||
| Cash Flow | Discount Factor@8% | Discounted Cash Flows | Cash Flow | Discount Factor@8% | Discounted Cash Flows | |
| A | B | C = 1/(1+8%)^A | D = B*C | E | F = 1/(1+8%)^A | G = E*F |
| 0 | -125000 | 1 | -125000 | -160000 | 1 | -160000 |
| 1 | -25000 | 0.925925926 | -23148.14815 | -20000 | 0.925925926 | -18518.51852 |
| 2 | -25000 | 0.85733882 | -21433.47051 | -20000 | 0.85733882 | -17146.77641 |
| 3 | -25000 | 0.793832241 | -19845.80603 | -20000 | 0.793832241 | -15876.64482 |
| 4 | -25000 | 0.735029853 | -18375.74632 | -20000 | 0.735029853 | -14700.59706 |
| 5 | -25000 | 0.680583197 | -17014.57993 | -20000 | 0.680583197 | -13611.66394 |
| 6 | -25000 | 0.630169627 | -15754.24067 | -20000 | 0.630169627 | -12603.39254 |
| 7 | -25000 | 0.583490395 | -14587.25988 | -20000 | 0.583490395 | -11669.80791 |
| 8 | -25000 | 0.540268885 | -13506.72211 | -20000 | 0.540268885 | -10805.37769 |
| 9 | -25000 | 0.500248967 | -12506.22418 | -20000 | 0.500248967 | -10004.97934 |
| 10 | -25000 | 0.463193488 | -11579.8372 | -20000 | 0.463193488 | -9263.869762 |
| Present Value | -292752.035 | -294201.628 | ||||
| Present Value of Owning supplier 1 Truck is $292,752.04 | ||||||
| Present Value of Owning supplier 2 Truck is $294,201.63 | ||||||
| Therefore, Contractor should choose Supplier 1 of trucks |
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