Question

4. Pretty Boy Construction Inc wants to purchase one of 2 dozers(mutually exclusive problem). The cost data is summarized below. Dozer A Dozer B Price/First Cost/Capital Cost $540,000 $608,000 Annual Maintenance Cost $2,300 $1,600 Salvage Value $54,000 $57,000 Expected Life 12 15 Assuming the rate of interest on borrowed money is 10% per annum, which of the two dozers will you advice the owner of Pretty Boy to purchase? Use the net annual value/worth method.

Answer 1

Conclusion: as per the solution provided in the picture ; the net annual worth of Dozer A is -$79,026.98 whereas net annual worth of Dozer B is -$79,742.05, so Dozer A is advised to be purchased.

0 Dozer A calculation of Present Value: I to.10 J Initial cost pv = $540,000 = ($549000) nnual maintenance cost i= $2,300 (1+0-10)--(415,671.49) 1 +0.10 Salvage price PV = $54,000 = $17,206 Met syent Value = -520000 - 15671.49 + 17206 = ($538465.192 7 Net annual worth = $538,465.4g ru to.10) 12 0.10 10:10)2- ($79026.99 - Dozer B : calculation of present value Initial vost PU = $608000 1 1°= ($ 608000) I tolo J lto.lo) 5-1 T Annual maintenance Cost Pu= $1600 = (12169-73) 0.10(1+0.60) is salvage value pu = $57000 = $1364535 to lo 12169.73 +13645.35= ($606524.38) Net present value elent value = ($ 608000 Netdynual worth = - $606524,38 7 ($79742.05) (41.10)'s 0.10 I(1+0.10)15-1