Answered: A heavy equipment rental company…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 18P: Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting...

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A heavy equipment rental company intends to replace a grader. It was purchased 5 years ago at a cost of $120,000. It was estimated to have a useful life of 10 years. It could be traded in now for $20,000. Due to frequent breakdown and repairs it was rented out for only 1,400 hours during the past year and the total repair cost was $6,000. A new grader is now available costing $200,000 and it is predicted to have an economic life of 10 years. It is expected to be rented at least 2,100 hours a year and maintenance cost will not exceed $3,500. All other out-of-pocket costs for the two machines would equal. If money is worth 15%, what must be the hourly rental rate for the new grader so that it could replace the old one?

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