Allen Construction purchased a crane 6 years ago for $130,000. They need a crane of this capacity for the next 5 years. Normal operation costs $35,000 per year. The current crane will have no salvage value at the end of 5 more years. Allen can trade in the current crane for its market value of $40,000 toward the purchase of a new one, which costs $150,000. The new crane will cost only $8,000 per year under normal operating conditions and will have a salvage value of $55,000 after 5 years. If MARR is 20%, determine which option is preferred. a) Use cash flow approach (insider's viewpoint approach) b) Use the opportunity cost approach (outsider's viewpoint approach)
Allen Construction purchased a crane 6 years ago for $130,000. They need a crane of this capacity for the next 5 years. Normal operation costs $35,000 per year. The current crane will have no salvage value at the end of 5 more years. Allen can trade in the current crane for its market value of $40,000 toward the purchase of a new one, which costs $150,000. The new crane will cost only $8,000 per year under normal operating conditions and will have a salvage value of $55,000 after 5 years. If MARR is 20%, determine which option is preferred. a) Use cash flow approach (insider's viewpoint approach) b) Use the opportunity cost approach (outsider's viewpoint approach)
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter14: Pricing Techniques And Analysis
Section: Chapter Questions
Problem 1.1CE: What life cycle cost concept begins raising concerns by year 5 with any electric vehicle (EV)? If...
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Allen Construction purchased a crane 6 years ago for $130,000. They need a crane of this capacity for the next 5 years. Normal operation costs $35,000 per year. The current crane will have no salvage value at the end of 5 more years. Allen can trade in the current crane for its market value of $40,000 toward the purchase of a new one, which costs $150,000. The new crane will cost only $8,000 per year under normal operating conditions and will have a salvage value of $55,000 after 5 years. If MARR is 20%, determine which option is preferred.
a) Use cash flow approach (insider's viewpoint approach)
b) Use the opportunity cost approach (outsider's viewpoint approach)
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