Question

please solve problem 1

Name. Problem 1: A track dozer cost $185,500 to purchase. Fuel, oil, grease, and minor maintenance are estimated to cost $37.00 per operating hour. A major engine repair costing $26,000 will probably be required after 7,200 hr of use. The expected resale price (salvage value) is 21% of the original purchase price. The machine is expected to have a useful life of 10,800 hr. How much should the owner of the machine charge per hour of use, if it is expected that the machine will operate 1,800 hr per year? The company's cost-of-capital rate is 7.3%.

i dont need help with the next question i need it with this one

Answer 1

Dozer Cost = 185500 $

Machine useful life = 10800 hr

Total hours machine will operate per year = 1800 hr

Therefore number of years machine will operate = 10800/1800

= 6 years

Major engine repair cost after 7,200 hr ( 4 years ) of use = 26000 $

Here we will consider that the Major engine repair is done only once i.e after 4 yr in the life span of Dozer , which is total of 6 years.

Fuel , oil , grease and minor maintenance cost for entire life of dozer (i.e. 10800 hrs) = 37 X 10800

= 399,600 $

Expected Resale Price (salvage value) i.e. 21 % of original purchase price = 21% of 185500

= 38955 $

Therefore the total operating cost of Dozer in a life span of 6yrs (i.e. 10800hrs) = {Dozer cost +  Fuel , oil , grease and minor maintenance cost + Major Engine repair cost - Resale Price }

= {185,500 + 399,600 + 26,000 - 38,955}

= 572,145 $

So, per hour cost of operating dozer = 572,145 $ / 10,800 hr

= 52.97 $/hr or approx 53 $/hr

Cost of operating Dozer per year = 52.97 $/hr X 1800 hr

= 95346 $

Investing total 572,145 $ at 7.3 % (cost of capital rate) for 6 years the amount would be = A = P (1 + r/n) ^(nt) (Compound Interest )

• A = Future value of the investment including interest
• P = Principal investment amount ( 572,145 $)
• r = Annual interest rate (7.3% or 0.073)
• n = Number of times that interest is compounded per unit time (1 , here we assume that that interest is compounded once a year )
• t = Total time money is invested (6 years)

So total Amount after 6 years Amount = 572145 ( 1 + 0.073/1) ^{(1 * 6 )}

Amount = 873181.33 $

So to meet the industry standards or to make the Dozer profitable the owner must earn 873181.33 $ for a period of 6 yrs or 10,800 hrs.

Therefore the rate he must charge for the dozer per hour = 873181.33 $ / 10,800 hrs

= 80.85 $ or approx 81 $ per hour.

His operating cost per hour is 53 $ per hour and he must charge 81 $ per hour to get profit as per industry standards.

Hope it helps !!!