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A contractor is considering purchasing a used tractor for $150,000 that she could use for 10...

A contractor is considering purchasing a used tractor for $150,000 that she could use for 10 years and then sell for an estimated salvage value of $5,000. Annual maintenance and repair costs for the used tractor are estimated to be $10,000 per year. As an alternative, the contractor could rent a similar tractor for $3,000 per month or $36,000 per year. How much does it cost annually to buy the equipment at 10% interest? Use the time value calculator provided. Round all answers to two decimal places.

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Answer #1

Annual cost to buy equipment

we will first find present value and than divide it with annuity to get annual cost

Annual Cost= [(present value of initial investment-present value of salvage)/Annuity factor+cost of repairs and maintenance]

=$-150,000 (A/P,10%,10)-$10,000+$5,000(A/F,10%,10)

=$150,000/6.1445671 -1,927.7164/6.1445671) +$10,000

=$24,411.81-$313.7269+$10,000

=$34,098.08

it cost $34,098.08 annually to buy the equipment at 10% interest

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