The Smooth Paving Company must purchase a compactor to meet the growing demands for road construction...

  

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The Smooth Paving Company must purchase a compactor to meet the growing demands for road construction and resurfacing. The key parameters of the three compactors under scrutiny are provided below. Parameters Alpha Beta Gamma 1. Initial Cost ($) 120,000 180,000 225,000 $140,000 at EOY1 increasing by $5,000 annually to ΕΟΥ3 (=$150,000); thereafter decreasing by $20,000 annually to EOY5 (=$110,000) $146,100 at ΕΟΥ1 $250,000 at ΕΟΥ1 increasing by 1% annually to ΕΟΥ5 2. Revenues ($) increasing by 1% annually to ΕΟΥ10 117,000 at ΕΟΥ1 $173,000 at ΕΟΥ1 3. Operating Costs ($) $97,000 at EOY1 decreasing annually by $500 decreasing by 1% annually to ΕΟΥ10 increasing by 3% annually to EOY5 to EOY5 4. End-of-life salvage value ($) 5. Useful life (years) 5,000 ($20,000) 5 years All parameter values are fictitious. EOY = End-of-year • Industry Standard = 2.5 years 10 years 5 years MARR = 10% %3D ($) = Negative dollar amount 2. 26. If the costliest (most expensive) compactor (i.e., Gamma) had the highest individual (specific) external rate of return, could you conclude (without calculating incremental ERRS) that Gamma was the best compactors? If the Smooth Paving Company's compactors capital budget was $1,400,000, which compactors(s) should the Company purchase if compactors are independent investments? 27. If the Smooth Paving Company purchased two (2) compactors in 2021 (one in January and one in July), which compactor should it purchase in January? 28. The Smooth Paving Company must purchase a compactor to meet the growing demands for road construction and resurfacing. The key parameters of the three compactors under scrutiny are provided below. Parameters Alpha Beta Gamma 1. Initial Cost ($) 120,000 180,000 225,000 $140,000 at EOY1 increasing by $5,000 annually to ΕΟΥ3 (=$150,000); thereafter decreasing by $20,000 annually to EOY5 (=$110,000) $146,100 at ΕΟΥ1 $250,000 at ΕΟΥ1 increasing by 1% annually to ΕΟΥ5 2. Revenues ($) increasing by 1% annually to ΕΟΥ10 117,000 at ΕΟΥ1 $173,000 at ΕΟΥ1 3. Operating Costs ($) $97,000 at EOY1 decreasing annually by $500 decreasing by 1% annually to ΕΟΥ10 increasing by 3% annually to EOY5 to EOY5 4. End-of-life salvage value ($) 5. Useful life (years) 5,000 ($20,000) 5 years All parameter values are fictitious. EOY = End-of-year • Industry Standard = 2.5 years 10 years 5 years MARR = 10% %3D ($) = Negative dollar amount 2. 26. If the costliest (most expensive) compactor (i.e., Gamma) had the highest individual (specific) external rate of return, could you conclude (without calculating incremental ERRS) that Gamma was the best compactors? If the Smooth Paving Company's compactors capital budget was $1,400,000, which compactors(s) should the Company purchase if compactors are independent investments? 27. If the Smooth Paving Company purchased two (2) compactors in 2021 (one in January and one in July), which compactor should it purchase in January? 28.

Answer rating: 100% (QA)

Solution Since the useful life of the three options is not the same we will use the AEW Annual Equivalent Worth approach instead of the net present va... View the full answer