You have been asked to evaluate two mutually exclusive earth-moving pieces of equipment used during the construction of a major highway. Two different brands are being considered. Your project will require an earth-mover for a period of 6 years, however neither brand being considered has a useful life of 6 years. A rental company can provide you an equivalent earth-mover for either a 1-, or a 2-years contract period. Rental includes delivery and all required maintenance. Rental expense is estimated to be $48,000 per rental year for either a 1-, or a 2-year rental contract payable at the beginning of each rental year. Your companys MARR is 20%.

You develop the following estimates for the 6-year study period:

Caterpillar Useful Life is 4 Years
Capital Investment	$122,000
Estimated annual revenue over 6 years	$137,000 increasing at 2% per year
Estimated annual maintenance over useful life	$34,000
Salvage Value at end of useful life	$12,200
Rental expenses	$48,000 EOY 4 and 5

Case Useful Life is 5 years
Capital Investment	$157,000
Estimated annual revenue over 6 years	$137,000 increasing at 2% per year
Estimated annual maintenance over useful life	$32,000
Salvage Value at end of useful life	$11,700
Rental expense	$48,000 EOY 5

1. Draw your cash flow diagrams for each of the two earth-movers being considered including rental expenses.
2. Using the incremental investment analysis procedure based on incremental IRR, which earth-mover would you recommend? Draw your incremental cash flow diagram. Your decision to accept or reject any alternative must be based on incremental IRR > or < MARR.
3. Using the incremental investment analysis procedure based on incremental ERR, which earth-mover you will recommend? Your decision to accept or reject any alternative must be based on incremental ERR > or < MARR.