OM Construction Company Must Choose Between Two Types of Cranes

question 40

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 percent per year.Which machine should OM Construction purchase?

• A)Crane A, because EAC is $226,444
• B)Crane B, because EAC is $194,336
• C)Crane A, because its PV is $816,286 (i.e., less than the PV of Project B)
• D)The answer cannot be calculated because the revenues for the project are not given.

---

Definitions:

Stock Investments

Investments in the equity or stock of another company, intending to earn dividends or sell for profit.

Debt Investments

Financial assets representing money lent to an entity (corporate or governmental) that must be paid back with interest.

Historical Cost

The original monetary value of an asset, as recorded on the balance sheet, without adjustments for inflation or market changes.

Brokerage Fees

Charges imposed by a brokerage firm for facilitating transactions, such as buying or selling securities, for its clients.