OM Construction Company Must Choose Between Two Types of Cranes

question 23

Multiple Choice

OM Construction Company must choose between two types of cranes.Crane A costs $600,000,will last for five years,and will require $60,000 in maintenance each year.Crane B costs $750,000,will last for seven years,and will require $30,000 in maintenance each year.Maintenance costs for cranes A and B occur at the end of each year.The appropriate discount rate is 12% per year.Which machine should OM Construction purchase?

• A)Crane A as EAC is $226,444
• B)Crane B as EAC is $194,336
• C)Crane A because its PV is $816,286,i.e.,less than the PV of Project B
• D)Cannot be calculated as the revenues for the project are not givenCrane A: Annuity factor = (1/.12)× (1 - (1/(1.12^5)))= 3.6048.Crane B: Annuity factor = (1/.12)× (1 - (1/(1.12^7)))= 4.5638.Costs:PV (A)= 600,000 + 60,000 (3.6048)= 816,286;EAC = 816,286/(3.6048)= $226,444;PV(B)= 750,000 + 30,000 (4.5638)= 886,913;