## 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 β 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(

1β(

1+π

1+π

)^π

πβπ

)*(A/P, 18%, 4) where j is

rate of increasing

= $20,000*(

1β (

1+0.1

1+0.18)^4

0.18β0.1

) β (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 β $50,000 β $9,400 β $22,754 β

$245,199.7 = β $12,162.1

Equivalent Uniform Annual Worth = (β $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(

1β(

1+π

1+π

)^π

πβπ

)*(A/P, 18%, 8) where j is

rate of increasing

= $20,000*(

1β (

1+0.1

1+0.18)^8

0.18β0.1

) β (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 β $50,000 β $9,400 β $26,346.4 β

$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 β $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(

1β(

1+π

1+π

)^π

πβπ

)*(A/P, 18%, 8) where j is

rate of increasing

= $20,000*(

1β (

1+0.1

1+0.18)^8

0.18β0.1

) β (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 β $50,000 β $9,400 β $26,346.4 β

$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(

1β(

1+π

1+π

)^π

πβπ

)*(A/P, 18%, 4) where j is

rate of increasing

= $20,000*(

1β (

1+0.1

1+0.18)^4

0.18β0.1

) β (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 β $50,000 β $9,400 β $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.