A construction contractor has three options to purchase a dump truck for transportation and dumping of soil at a construction site. All the alternatives have the same useful life. The cash flow details of all the alternatives are provided as follows;

Option-1: Initial purchase price = P2,500,000Annual operating cost P450,00 at the end of 1st year and increasing by P3,000 in the subsequent years till the end of useful life, Annual income = P120,000, Salvage value = P550,000, Useful life = 10 years.

Option-2: Initial purchase price = P3,000,000, Annual operating cost = P30,000, Annual income P150,000 for first three years and increasing by P5,000 in the subsequent years till the end of useful life, Salvage value = P800,000, Useful life = 10 years.

Option-3: Initial purchase price = P2,700,000, Annual operating cost P35,000 for first 5 years and increasing by P2,000 in the successive years till the end of useful life, Annual income = P140,000, Expected salvage value = P650,000, Useful life = 10 years.

Using present worth method, find out which alternative should be selected, if the rate of interest is 8% per year.

Answer rating: 100% (QA)

Solution as follows Since the interest rate is not provided in the question we will assume an intere... View the full answer