Question

The owners of a concrete batching plant have in use a power steam shovel, which, if repaired at a cost of $2000, would last another 10 years. Maintenance costs, operating costs, taxes, and insurance would be $2500 per year. The present salvage value of the power steam shovel is $6000; if it is repaired and used for 10 years, the estimated salvage value at the end of that time is estimated to be $500. A new power shovel could be purchased at a cost of $30,000, and its estimated salvage value at the end of 10 years would be $20,000. The maintenance costs, operating costs, taxes, and insurance would be $1500 per year. Using straight-line depreciation and average interest, with interest at 6 percent, which of the following most nearly equals the difference of the two alternatives? (a) $460 (b) $475 (c) $490 (d) $500 (e) $515

Answer 1

Please find the workings under both the options:

Repair option:	$
Cost of Repairs	2,000
Add: Maintenance and other costs for 10 year (2500*10)	25,000
Total cost	27,000
Less: Salvage value at end of 10 years	-500
Net Outflow under repair option	26,500
New Purchase Option:
Less: Old power shovel cost which will be sold at time of new purchases	-6,000
Add: Maintenance and other costs for 10 year (1500*10)	15,000
Add: Interest cost on New cost less salvage value of old (30000 less 6000) @ 6% for 10 year- 24000*6%*10	14,400
Add: Depreciation	10,000
Net Outflow under New purchase option	33,400
Difference	6,900