The government is considering purchasing some excavating equipment. It has a first cost of $65,000, will result in annual savings to the public of $20,000 per year, and will be sold for $15,000 at the end of its useful life. The useful life is 5 years, and the MARR is 6%.
a. Determine the benefits to cost (B/C) ratio for this situation. Should the government invest in the excavating equipment?
b. An intern working with the company came across some alternative equipment that has a first cost of $85,000, will result in a savings to the public of $25,000 per year, and will be sold for $20,000 at the end of its useful life, which is also 5 years. Using the incremental B/C analysis procedure, and the results from “a”, determine if it’s economically sound for the company to invest in the more expensive equipment at a MARR of 6%.
c. For the data in parts a and b, use the Incremental Internal Rate of Return (IRR) procedure to determine which equipment (if any) should be chosen. Assume a MARR of 6% (you can use Excel for this portion- please upload your file to Moodle, or email it to me). Record your results here, and briefly explain your conclusion.
d. For the data in parts a and b, construct a choice table, for values for i from 0 to 100%, and graph the results. Based on these results, and a MARR of 6%, which alternative should be chosen? Would your decision change if your MARR was 15%? What if your MARR was 50%? (you can use Excel for this portion- please upload your file to Moodle, or email it to me). Record your results here, and briefly explain your conclusion.