Required Information A land development company is considering the purchase of earth-moving equipment. This equipment will have an estimated first cost of $166,000, a salvage value of $70,000, a life of 10 years, a maintenance cost of $30,000 per year, and an operating cost of $260 per day. Alternatively, the company can rent the necessary equipment for $1040 per day and hire a driver at $180 per day. When approached to rent for the breakeven number of days, the equipment owner indicated that the minimum rental is for 100 days per year, however, he might consider a lower daily rental cost. What is the daily rental cost to justify renting over purchasing? If the equipment was purchased, assume it would be used for the breakeven number of days. Determine the required rental cost per day.
Required Information A land development company is considering the purchase of earth-moving equipment. This equipment will have an estimated first cost of $166,000, a salvage value of $70,000, a life of 10 years, a maintenance cost of $30,000 per year, and an operating cost of $260 per day. Alternatively, the company can rent the necessary equipment for $1040 per day and hire a driver at $180 per day. When approached to rent for the breakeven number of days, the equipment owner indicated that the minimum rental is for 100 days per year, however, he might consider a lower daily rental cost. What is the daily rental cost to justify renting over purchasing? If the equipment was purchased, assume it would be used for the breakeven number of days. Determine the required rental cost per day.
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter12: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 10P: Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6...
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Step 1 Introduction (for yours reference)
VIEWStep 2 Calculation of Total cost per year (100 days of operation) under Purchase option
VIEWStep 3 Calculation of Total cost per year (for 100 days of operation) under Rental option
VIEWStep 4 Calculation of Daily rental cost to justify renting over purchase (Indifference point)
VIEWStep 5 Proof: If rental cost per day is $ 475 then total cost under rental option is
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