Clear Water Company has a down-hole well auger that was purchased 3 years ago for $30,000. O&M costs are $13,000 per year. Alternative A is to keep the existing auger, which has a current market value of $9,000. It will have a $0 salvage value after 7 more years. Alternative B is to buy a new auger that will cost $61,000 and will have a $12,000 salvage value after 7 years. O&M costs are $8,000 for the new auger. Clear Water can trade in the existing auger on the new one for $15,000. Alternative C is to trade in the existing auger on a "treated auger" that requires vastly less O&M cost at only $3,500 per year. It costs $71,000, and the trade-in allowance for the existing auger is $17,000. The "treated auger" will have an $18,000 salvage value after 7 years. Alternative D is to sell the existing auger on the open market and to contract with a current competitor to use their equipment and services to perform the drilling that would normally be done with the existing auger. The competitor requires a beginning-of-year retainer payment of $12,000. End-of-year O&M cost would be $8,000. MARR is 15%, and the planning horizon is 7 years. Click here to access the TVM Factor Table Calculator Part a Clearly show the cash flow profile for each alternative using a cash flow approach (insider's viewpoint approach). EOY Alternative A Alternative B Alternative C Alternative D 0 1 $ 2 3 4 5 6 $ 7 $ $ $ $ $ $ 19 VA VA 14 $ VA 14 $ $ Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is
Clear Water Company has a down-hole well auger that was purchased 3 years ago for $30,000. O&M costs are $13,000 per year. Alternative A is to keep the existing auger, which has a current market value of $9,000. It will have a $0 salvage value after 7 more years. Alternative B is to buy a new auger that will cost $61,000 and will have a $12,000 salvage value after 7 years. O&M costs are $8,000 for the new auger. Clear Water can trade in the existing auger on the new one for $15,000. Alternative C is to trade in the existing auger on a "treated auger" that requires vastly less O&M cost at only $3,500 per year. It costs $71,000, and the trade-in allowance for the existing auger is $17,000. The "treated auger" will have an $18,000 salvage value after 7 years. Alternative D is to sell the existing auger on the open market and to contract with a current competitor to use their equipment and services to perform the drilling that would normally be done with the existing auger. The competitor requires a beginning-of-year retainer payment of $12,000. End-of-year O&M cost would be $8,000. MARR is 15%, and the planning horizon is 7 years. Click here to access the TVM Factor Table Calculator Part a Clearly show the cash flow profile for each alternative using a cash flow approach (insider's viewpoint approach). EOY Alternative A Alternative B Alternative C Alternative D 0 1 $ 2 3 4 5 6 $ 7 $ $ $ $ $ $ 19 VA VA 14 $ VA 14 $ $ Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:Clear Water Company has a down-hole well auger that was purchased 3 years ago for $30,000. O&M costs are $13,000 per year.
Alternative A is to keep the existing auger, which has a current market value of $9,000. It will have a $0 salvage value after 7 more
years. Alternative B is to buy a new auger that will cost $61,000 and will have a $12,000 salvage value after 7 years. O&M costs are
$8,000 for the new auger. Clear Water can trade in the existing auger on the new one for $15,000. Alternative C is to trade in the
existing auger on a "treated auger" that requires vastly less O&M cost at only $3,500 per year. It costs $71,000, and the trade-in
allowance for the existing auger is $17,000. The "treated auger" will have an $18,000 salvage value after 7 years. Alternative D is to
sell the existing auger on the open market and to contract with a current competitor to use their equipment and services to perform
the drilling that would normally be done with the existing auger. The competitor requires a beginning-of-year retainer payment of
$12,000. End-of-year O&M cost would be $8,000. MARR is 15%, and the planning horizon is 7 years.
Click here to access the TVM Factor Table Calculator
Parta
Clearly show the cash flow profile for each alternative using a cash flow approach (insider's viewpoint approach).
EOY
Alternative A
Alternative B
Alternative C
Alternative D
0
1
2
3
4
5
6
7
$
$
$
$
$
$
$
s
$
VA
$
29
LA
tA
$
LA
17
LA
Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is
+10.
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