Question

Two models of earth auger drills are considered for purchase. Both are capable of performing the work required. Estimates of costs are as follows: Model Mole Badger $30,000 12 years First cost Service life Salvage value 1st year operating cost Annual increase op. cost - -- - - $50,000 12 years $14,000 $6,750 $400 $8,000 $500 Using a minimum rate of return of 12%, compare the equivalent uniform annual costs for the two machines over the 12 year service life.

Answer 1

Machine Mole :

Years	Initial Cost	Operation Cost	Net Cash Outflow	PVF @ 12%	Present Value
0	30000		30000	1.000	30000.000
1		8000	8000	0.893	7142.857
2		8500	8500	0.797	6776.148
3		9000	9000	0.712	6406.022
4		9500	9500	0.636	6037.422
5		10000	10000	0.567	5674.269
6		10500	10500	0.507	5319.627
7		11000	11000	0.452	4975.841
8		11500	11500	0.404	4644.657
9		12000	12000	0.361	4327.320
10		12500	12500	0.322	4024.665
11		13000	13000	0.287	3737.189
12		13500	13500	0.257	3465.114
				Total	92531.132

Machine: Badger

Calculation of Present Value of Machine
Years	Initial Cost	Operation Cost	Salvage Value	Net Cash Outflow	PVF @ 12%	Present Value
0	50000			50000	1.000	50000.000
1		6750		6750	0.893	6026.786
2		7150		7150	0.797	5699.936
3		7550		7550	0.712	5373.941
4		7950		7950	0.636	5052.369
5		8350		8350	0.567	4738.014
6		8750		8750	0.507	4433.022
7		9150		9150	0.452	4138.995
8		9550		9550	0.404	3857.085
9		9950		9950	0.361	3588.070
10		10350		10350	0.322	3332.423
11		10750		10750	0.287	3090.368
12		11150	-14000	-2850	0.257	-731.524
					Total	98599.485

Comparison :-

Years	Excess Cost of purchasing Badger	Saving on Purchasing Badger	PVF@12%	Present value
0	-20000		1	-20000
1		1250	0.893	1116.071
2		1350	0.797	1076.212
3		1450	0.712	1032.081
4		1550	0.636	985.053
5		1650	0.567	936.254
6		1750	0.507	886.604
7		1850	0.452	836.846
8		1950	0.404	787.572
9		2050	0.361	739.251
10		2150	0.322	692.242
11		2250	0.287	646.821
12		16350	0.257	4196.638
			Net Impact	-6068.3533

Its not better to purchase badger