Allen Construction purchased a crane 6 years ago for $130,000. It needs 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 that 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. Solve, a. Use the cash flow approach (insider’s view point approach). b. Use the opportunity cost approach (outsider’s view point approach).
Allen Construction purchased a crane 6 years ago for $130,000. It needs 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 that 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. Solve, a. Use the cash flow approach (insider’s view point approach). b. Use the opportunity cost approach (outsider’s view point approach).
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