Question: Show full solution, Do not use Excel Spreadsheet, Draw cashflow diagrams where applicable 5- The city of Pleasentville is planning to buy a modern TBM

Show full solution, Do not use Excel Spreadsheet, Draw cashflow diagrams where applicable

5- The city of Pleasentville is planning to buy a modern TBM (Tunnel Boring Machine) at a price tag of $2.5 million. The brand new TBM is going to last 8 years and will save the city $480,000 per year. The machine has a good residual value and can be sold for $1.1 million the end of 8 years. The other alternative is to spend $1.1 million and repair the existing old TBM the city owns. This would extend the old machine's life 8 more years from now and will also save the city $166,000 per year. The salvage value of the repaired machine is going to be $540,000 at the end of year 8. Identify the best alternative using incremental benefit-cost ratio analysis. The MARR is 10%.(8 Marks)

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