Question 17.10: Your company is looking at purchasing the front-end loader i...
Your company is looking at purchasing the front-end loader in Example 17-3 at a cost of $120,000.
The loader would have a useful life of five years with a salvage value of $12,000 at the end of the fifth year. The loader can be billed out at $95.00 per hour. It costs $30.00 per hour to operate the front-end loader and $25.00 per hour for the operator. Using 1,200 billable hours per year, determine the future worth for the purchase of the loader using a MARR of 20%. Should your company purchase the loader?
The future value of the purchase price is determined by using Eq. (15-1) as follows:
F=P(1+i)^{n} (15-1)
F_{ PP }=-\$ 120,000(1+0.20)^{5}=-\$ 298,598
The future value of the purchase price is negative because it is a cash disbursement.
The hourly profit on the loader equals the billing rate less the operation cost and the cost of the operator and is calculated as follows:
\text { Hourly Profit }=\$ 95.00 / hr -\$ 30.00 / hr -\$ 25.00 / hr
\text { Hourly Profit }=\$ 40.00 / hr
The annual profit on the loader equals the hourly profit times the number of billable hours per year and is calculated as follows:
\text { Annual Profit }=(\$ 40.00 / hr )(1,200 hr / yr )=\$ 48,000 / yr
The future value of the annual profits is determined by using Eq. (15-5) as follows:
F=A\left[\frac{(1+i)^{n}-1}{i}\right] (15-5)
F_{ AP }=\$ 48,000\left[\frac{(1+0.20)^{5}-1}{0.20}\right]=\$ 357,197
The future value of the annual profits is positive because it is a cash receipt.
The future value of the salvage value is equal to the salvage value because the future value is measured at the end of the study period.
The future value of the salvage value is positive because it is a cash receipt. The future worth for purchasing the loader equals the sum of the future values of the individual cash flows and is calculated as follows:
FW =-\$ 298,598+\$ 357,197+\$ 12,000=\$ 70,599
Because the future worth is greater than zero, the purchase of the front-end loader will produce a return greater than the MARR and your company should invest in the front-end loader.