QUSU07022 The Contractor has also decided that he will subsequently invest in a new curb-laying machine for this project.

Question 3

The Contractor has also decided that he will subsequently invest in a new curb-laying machine for this project. He has two options, A and B Option A has an initial cost of €60,000 an annual maintenance cost of €8,000, and a residual value after 9 years of €28,000. Option B has an initial cost of €70,000 an annual maintenance cost of €6,000 and a residual value after 9 years of €35,500.
Assuming an interest rate of 10% compounded annually, compare the equivalent annual worth of both curb laying machine options. Following your calculations please state which option you recommend and why.

First we must find the A/P factor of each option:
Using the formula i(i+1)ⁿ÷(1+i)ⁿ-1 gives us the A/P

A/P is as follows : 0.10(0.10+1)⁹÷(1+0.10)⁹-1=0.237÷1.357= 0.174 A/P = 0.174

To find the Aw of each option use the following

AW= -(P-SV)(A/P)-SV(i)-Annual maintenance

Option A :
AW= -(60,000-28,000)(0.174)-28,000(0.10)-8,000=
-(32,000)x(0.174)-28,000(0.10)-8,000=
-(32,000)x(0.174)-2800-8000=
= -€16,368

Option B :
AW= -(70,000-35,500)(0.174)-35,500(0.10)-6,000=
-(34,500)x(0.174)-35,500(0.10)-6000=
-(34500)x(0.174)-3550-6000=
=-€15,553

So with Both Answers giving a negative response, I would suggest going for the lesser negative which is option B but in real time probably would not go for either as there is a significant loss even with the lesser option.