Question

A contractor must choose between buying or renting a crane for the duration of a 3 year construction project. The contractor uses an MARR of 8%. At the end of the project, the crane can be sold for 32% of its initial cost. The cost to operate and maintain the crane is $220,000 per year. Renting the crane costs $300,000 per year including all operating and maintenance costs. Determine the maximum amount the contractor should pay to purchase the crane (i.e. the breakeven initial cost of the crane). Express your answer in $ to the nearest $1,000

Answer 1

Annual Cash Savings per year if the crane was bought = $300,000 - $220,000 = $80,000

Present Value of the savings if the crane was bought without considering the cost and the salavage value = 80000/1.08 + 80000/1.08^2 + 80000/1.08^3 = $199,263

Let the purchase cost of the crane be $ x

Then Salvage Value = 32%*x = 0.32x

Accordingly if the ccontractor would be neutral between the choice of buying or renting a crane,'

Present Value of Savings - Cost of Equipment + Salvage Value = 0

or, 199263 - x + .32x/1.08^3 = 0

or, 0.7638x = 199263

or, x = 260886= 261,00 ( closest to the nearest 1000)

Therefore, the contractor can pay a maximum of 261,000 for the purchase of the crane.