HW#5 Last year your company purchased a used compressor for a gas gathering line system for $55,000. The field manager just called and informed you the machine broke down and needs to be replaced ASAP. You have found a new compressor with a purchase price of $97,830 that you can have delivered to the job site that would meet the necessary service requirements. Assume the new asset would have a zero-salvage value at the end of year 6. The other option is to rent a compressor and eliminate the upfront cost. The rental price will be $2,000 per month for 12 months paid at the beginning of each month. The rental agent informed you the cost is anticipated to escalate 5% at the end of each year. Build a 6-year model accounting for the cost escalation after 12 monthly payments. Based on a Present Worth Cost analysis should you lease or purchase? Confirm your selection by calculating an incremental NPV and ROR analysis. Your company uses a 12.68% effective annual interest rate. If there was a fee to buy the compressor, how much could it be to make you economically indifferent?

HW#5 Last year your company purchased a used compressor for a gas gathering line system for $55,000. The field manager just called and informed you the machine broke down and needs to be replaced ASAP. You have found a new compressor with a purchase price of $97,830 that you can have delivered to the job site that would meet the necessary service requirements. Assume the new asset would have a zero-salvage value at the end of year 6. The other option is to rent a compressor and eliminate the upfront cost. The rental price will be $2,000 per month for 12 months paid at the beginning of each month. The rental agent informed you the cost is anticipated to escalate 5% at the end of each year. Build a 6-year model accounting for the cost escalation after 12 monthly payments. Based on a Present Worth Cost analysis should you lease or purchase? Confirm your selection by calculating an incremental NPV and ROR analysis. Your company uses a 12.68% effective annual interest rate. If there was a fee to buy the compressor, how much could it be to make you economically indifferent?

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...

See similar textbooks

Similar questions

Energy entrepreneur T. Boone Pickens has proposed converting the trucking fleet in the United States to liquefied natural gas (LNG) and using wind power to replace the missing LNG in electric power production. What infrastructure issues do you see that must be resolved before the Pickens plan could be adopted?
What is deflation?
Metropolitan Hospital has estimated its average monthly bed needs as N=1,000+9X where X=timeperiod(months);January2002=0 N=monthlybedneeds Assume that no new hospital additions are expected in the area in the foreseeable future. The following monthly seasonal adjustment factors have been estimated, using data from the past five years: Forecast Metropolitans bed demand for January, April, July, November, and December 2007. If the following actual and forecast values for June bed demands have been recorded, what seasonal adjustment factor would you recommend be used in making future June forecasts?
If a government gains from unexpected inflation when it borrows, why would it choose to offer indexed bands?
Has the natural gas revolution in the United States made coal-fired power plants more or less profitable? Why or why not?
Investors sometimes fear that a high-risk investment is especially likely to have low returns. Is this fear true? Does a high risk mean the return must be low?
What is a capital gain?
What is die difference between accounting and economic profit?
Compute the inflation rate for fruit prices from 2001 to 2004.
With in 1 or 2 percentage points, what has the U.S. inflation rate been during the last 20 years? Draw a graph to show the data.
The Questor Corporation has experienced the following sales pattern over a 10-year period: Compute the equation of a trend line (similar to Equation 5.4) for these sales data to forecast sales for the next year. (Let 2004=0,2005=1, etc., for the time variable.) What does this equation forecast for sales in the year 2014? Use a first-order exponential smoothing model with a w of 0.9 to forecast sales for the year 2014.
What is a dividend?