The Stark County executives are considering the purchase of new
130 hp bulldozer and are comparing two models: the BEHEMOTH and the
GOLIATH. The BEHEMOTH bulldozer costs $130,000, with a projected
annual operating and maintenance cost of $31,000 and a salvage
value $15,000 after 7 years. The GOLIATH model costs $175,000, with
a projected annual operating and maintenance cost of $22,000 and a
salvage value of $21,000 after 7 years.
Calculate the net present value of the BEHEMOTH compressor and the
net present value of the GOLIATH compressor, with the cash flows
discounted annually at 12%. Which model should be purchased?
a | BEHEMOTH |
b | GOLIATH |
c | Either one can be purchased. |
d | Neither, since both will incur enormous loss. |
e | Need additional information to decide |
BEHEMOTH:
Initial Cost = $130,000
Annual Cost = $31,000
Salvage Value = $15,000
Life of Project = 7 years
NPV = -$130,000 - $31,000 * PVIFA(12%, 7) + $15,000 * PVIF(12%,
7)
NPV = -$130,000 - $31,000 * 4.5638 + $15,000 * 0.4523
NPV = -$264,693.30
GOLIATH:
Initial Cost = $175,000
Annual Cost = $22,000
Salvage Value = $21,000
Life of Project = 7 years
NPV = -$175,000 - $22,000 * PVIFA(12%, 7) + $21,000 * PVIF(12%,
7)
NPV = -$175,000 - $22,000 * 4.5638 + $21,000 * 0.4523
NPV = -$265,905.30
The company should choose neither of the project since both will incur enormous loss.
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