Purchase of diesel power shovel to improve its productivity

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Reference no: EM131133379

The ABC Construction Company is considering the purchase of a diesel power shovel to improve its productivity. The company finances the purchase by borrowing from a local bank with no origination fee. The pricipal will be repaid with the compounded interests (annual nominal interest rate: 10%) for 5 years. The bank compounds the financial charges semi-annually. The shovel, which costs $80,000, is expected to produce a benefit of $50,000 in the first year, and $4,000 less in each succeeding year for a total of 5 years (i.e., benefit of $46,000 in year 2, $42,000 in year 3, continuing to $34,000 in the fifth year). The annual mainenance and operation cost of the equipment is $15,000 over 5 years. The company will sell the equipment with the expected resale price of $5,000 at the end of year 5. Draw cash flow diagrams and determine whether the purchase is worthwhile at the MARR of 12%

Reference no: EM131133379

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