## 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(
1−(
1+?
1+?
)^?
?−?
)*(A/P, 18%, 4) where j is
rate of increasing
= \$20,000*(
1− (
1+0.1
1+0.18)^4
0.18−0.1
) ∗ (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(
1−(
1+?
1+?
)^?
?−?
)*(A/P, 18%, 8) where j is
rate of increasing
= \$20,000*(
1− (
1+0.1
1+0.18)^8
0.18−0.1
) ∗ (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(
1−(
1+?
1+?
)^?
?−?
)*(A/P, 18%, 8) where j is
rate of increasing
= \$20,000*(
1− (
1+0.1
1+0.18)^8
0.18−0.1
) ∗ (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
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(
1−(
1+?
1+?
)^?
?−?
)*(A/P, 18%, 4) where j is
rate of increasing
= \$20,000*(
1− (
1+0.1
1+0.18)^4
0.18−0.1
) ∗ (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.