Economics

1. Assumption:
Assume that doing nothing is not a viable alternative.
2. Equivalent Uniform Annual Worth Analysis:
The purchase list price of large bulldozer, P = $680,000
The salvage value after 4 years = $340,000
The salvage value after 8 years = $170,000
Life period = 8 years
a. Option 1:
Pay in full at the time of sale at the amount equal to the list price less a 3% discount for paying in
cash.
Initial cost = $680,000*(1 – 0.03) = $659,600
Initial Cost = $659,600
In the option 1 there are further two options:
i. Use for 4 years:
Uniform Annual cost of Initial Purchasing cost = $659,600*(A/P, 18%, 4) = $245,199.7
Operating and Maintenance Cost = $20,000 first year increase by 10% each year
Convert the increasing cost into uniform annual Operating and Maintenance Cost
Uniform annual Operating and Maintenance Cost = A1(
1βˆ’(
1+𝑔
1+𝑖
)^𝑛
π‘–βˆ’π‘”
)*(A/P, 18%, 4) where j is
rate of increasing
= $20,000*(
1βˆ’ (
1+0.1
1+0.18)^4
0.18βˆ’0.1
) βˆ— (0.37174) = $22,753.6
Uniform annual Operating and Maintenance Cost = $22,753.6
Insurance each year = $9,400
20% of rental income (Cost) = 0.2*$250,000 = $50,000
Annual Income = $250,000
Salvage value at the end of four year = $340,000
2
Uniform annual Salvage value = $340,000*(A/F, 18%, 4) =
Uniform annual Salvage value = $65,191.6
Equivalent Uniform Annual Worth = $250,000 + $65,191.6 – $50,000 – $9,400 – $22,754 –
$245,199.7 = – $12,162.1
Equivalent Uniform Annual Worth = (– $12,162.1)
ii. Use for 8 years:
Uniform Annual cost of Initial Purchasing cost = $659,600*(A/P, 18%, 8) = $161,760.3
Operating and Maintenance Cost = $20,000 first year increase by 10% each year
Convert the increasing cost into uniform annual Operating and Maintenance Cost
Uniform annual Operating and Maintenance Cost = A1(
1βˆ’(
1+𝑔
1+𝑖
)^𝑛
π‘–βˆ’π‘”
)*(A/P, 18%, 8) where j is
rate of increasing
= $20,000*(
1βˆ’ (
1+0.1
1+0.18)^8
0.18βˆ’0.1
) βˆ— (0.24524) = $26,346.4
Uniform annual Operating and Maintenance Cost = $26,346.4
Insurance each year = $9,400
20% of rental income (Cost) = 0.2*$250,000 = $50,000
Annual Income = $250,000
Salvage value at the end of four year = $340,000
Uniform annual Salvage value = $170,000*(A/F, 18%, 8) = $11,090.8
Uniform annual Salvage value = $11,090.8
Equivalent Uniform Annual Worth = $250,000 + $11,090.8 – $50,000 – $9,400 – $26,346.4 –
$161,760.3 = $13,584.1
Equivalent Uniform Annual Worth = $13,584.1
3
b. Option 2:
Pay for the new bulldozer with the eight-year loan. In this case, Art also would be required to
make
Initial Payment = 0.25*680,000 = $170,000
Uniform annual remaining purchasing cost = ($680,000 – $170,000) *(A/P, 12%, 8)
Uniform annual remaining purchasing cost = $510,000*0.21030 = $102,663
Total Uniform Annual of purchasing cost = $170,000*(A/P, 18%, 8) + $102,663
Total Uniform Annual of purchasing cost = $144,353.8
Operating and Maintenance Cost = $20,000 first year increase by 10% each year
Convert the increasing cost into uniform annual Operating and Maintenance Cost
Uniform annual Operating and Maintenance Cost = A1(
1βˆ’(
1+𝑔
1+𝑖
)^𝑛
π‘–βˆ’π‘”
)*(A/P, 18%, 8) where j is
rate of increasing
= $20,000*(
1βˆ’ (
1+0.1
1+0.18)^8
0.18βˆ’0.1
) βˆ— (0.24524) = $26,346.4
Uniform annual Operating and Maintenance Cost = $26,346.4
Insurance each year = $9,400
20% of rental income (Cost) = 0.2*$250,000 = $50,000
Annual Income = $250,000
Salvage value at the end of four year = $340,000
Uniform annual Salvage value = $170,000*(A/F, 18%, 8) = $11,090.8
Uniform annual Salvage value = $11,090.8
Equivalent Uniform Annual Worth = $250,000 + $11,090.8 – $50,000 – $9,400 – $26,346.4 –
$144,353.8 = $30,990.6
Equivalent Uniform Annual Worth = $30,990.6
4
c. Option 3:
Lease a new bulldozer for a four-year term at a cost of $136,000 per year, each year paid in
advance.
Since lease cost paid in advance so the cost at the end of period = $136,000*(F/P, 18%, 1) =
$160,480
Operating and Maintenance Cost = $20,000 first year increase by 10% each year
Convert the increasing cost into uniform annual Operating and Maintenance Cost
Uniform annual Operating and Maintenance Cost = A1(
1βˆ’(
1+𝑔
1+𝑖
)^𝑛
π‘–βˆ’π‘”
)*(A/P, 18%, 4) where j is
rate of increasing
= $20,000*(
1βˆ’ (
1+0.1
1+0.18)^4
0.18βˆ’0.1
) βˆ— (0.37174) = $22,753.6
Uniform annual Operating and Maintenance Cost = $22,753.6
Insurance each year = $9,400
20% of rental income (Cost) = 0.2*$250,000 = $50,000
Annual Income = $250,000
Equivalent Uniform Annual Worth = $250,000 – $50,000 – $9,400 – $160,480-$22,753.6 =
$30,120
Equivalent Uniform Annual Worth = $7,366.4
3. Recommendation:
Option 2 is best option with Equivalent Uniform annual worth of $30,990.6. So, option 2 is the
most profitable. In addition, option 1 in period of eight years is the best alternative for option 2.

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