Question: Your company is considering the purchase of a diesel pile hammer for $250, 000. The annual operating cost of the equipment for the first year is $10, 000 and increases thereafter $1, 000 every year. Your sales department is forecasting demand of 40 piles to be driven per year over the 10 year life. Your company charges its clients $1, 000 to drive each pile. Assume a salvage value $20, 000, a rate of return (ROR) of 8% p.a., and a life of 10 years.
a) Use ANNUAL WORTH to determine if this is a worthwhile investment.
b) From the analysis, would you expect the actual ROR to be higher or lower than the 8% given? Explain your reasoning.