A company requires the services of a forklift for the next 10 years and is considering...
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A company requires the services of a forklift for the next 10 years and is considering the following options: Option A: Purchase a new forklift for $21,000 along with a maintenance contract from the forklift dealership having an annual cost of $300 (actual dollars). The contract would cover the costs of repair and maintenance work required over the life of the forklift. The company would then sell the forklift in 10 years for a salvage value of $5,500 estimated in real dollars. Option B: Lease a forklift over the 10-year period. The present worth of the lease is estimated at -$18,000. Option C: Purchase a used forklift for $15,000$ that will save the company $2,300 (actual dollars) in annual rental costs. The forklift will be used for 10 years. The salvage value at the end of its life will be $0. The real MARR is 9% and inflation is predicted to be 2.5% per year over the next 10 years. (a) Draw the cash flow diagram for option A and show all the values in actual dollars. (b) Compute the present worth of option A. (c) Below which salvage value in option A would the company prefer the lease rather than the purchase of the new forklift (i.e. prefer option B over option A)? Express the salvage value in real dollars. (d) Based on the information provided for option C, calculate the IRR for this option. Should the company invest in option C? Justify your answer. A company requires the services of a forklift for the next 10 years and is considering the following options: Option A: Purchase a new forklift for $21,000 along with a maintenance contract from the forklift dealership having an annual cost of $300 (actual dollars). The contract would cover the costs of repair and maintenance work required over the life of the forklift. The company would then sell the forklift in 10 years for a salvage value of $5,500 estimated in real dollars. Option B: Lease a forklift over the 10-year period. The present worth of the lease is estimated at -$18,000. Option C: Purchase a used forklift for $15,000$ that will save the company $2,300 (actual dollars) in annual rental costs. The forklift will be used for 10 years. The salvage value at the end of its life will be $0. The real MARR is 9% and inflation is predicted to be 2.5% per year over the next 10 years. (a) Draw the cash flow diagram for option A and show all the values in actual dollars. (b) Compute the present worth of option A. (c) Below which salvage value in option A would the company prefer the lease rather than the purchase of the new forklift (i.e. prefer option B over option A)? Express the salvage value in real dollars. (d) Based on the information provided for option C, calculate the IRR for this option. Should the company invest in option C? Justify your answer.
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a Cash Flow for Option A Year 0 21000 Purchase of new forklift Year 1 300 Ma... View the full answer
Related Book For
Financial Accounting
ISBN: 978-0078025556
8th edition
Authors: Robert Libby, Patricia Libby, Daniel Short
Posted Date:
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