Question: A material supply contractor has two options (i.e. from two different manufacturing companies, Company-1 and Company-2) to purchase a tractor for supply of construction materials.

A material supply contractor has two options (i.e. from two different manufacturing companies, Company-1 and Company-2) to purchase a tractor for supply of construction materials. The details of cash flow of the two options are given below; Company-1 Tractor: Initial purchase cost = Rs.2000000, Annual operating cost including labor and maintenance = Rs.50000, Cost of new set of tires to be replaced at the end of year 3', year 6' and year 9' = Rs.110000 each, Expected salvage value = Rs.520000, Useful life = 10 years. Company-2 Tractor: Initial purchase cost = Rs.2200000, Annual operating cost including labor and maintenance = Rs.27000, Cost of new set of tires to be replaced at the end of year 4' and year 8' = Rs.120000 each, Expected salvage value = Rs.700000, Useful life = 10 years. Determine which company tractor should be selected on the basis of equivalent uniform annual worth at the interest rate of 2 % per year . Clearly demonstrate the Data, Solution and Cash Flow Diagram.

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