An engineer must decide between two ways to pump concrete to the top of a seven-story build­ing. Plan 1 requires the leasing of equipment for $60,000 initially and will cost between $0.40 and $0.95 per metric ton to operate, with a most likely cost of $0.50 per metric ton. The pumper is able to deliver 100 metric tons per 8-hour day. If leased, the asset will have a contract period of 5 years. Plan 2 is rental option that will cost $15,000 per year. In addition, an extra $15 per hour labor cost will be incurred for operating the rented equipment per 8-hour day. Which plan should the engineer recommend if the equipment will be needed for 50 days per year? The MARR is 12% per year.

Question

What will be an ideal response?

Answer 1

Plan 1 - Lease

Opt: $0.40 per ton (AOC = $2000)
AW = -60,000(A/P,12%,5) - 0.40(100)(50)
= -60,000(0.27741) - 2000
= $-18,645
ML: $0.50 per ton (AOC = $2500)
AW = -60,000(A/P,12%,5) - 0.50(100)(50)
= -60,000(0.27741) - 2,500
= $-19,145
Pess: $0.95 per ton (AOC = $3750)
AW = -60,000(A/P,12%,5) – 0.95(100)(50)
= -60,000(0.27741) – 3750
= $-21,395
Plan 2 – Rental
AW = -15,000 - 50(8)(15.00) = $-21,000 per year

Plan 1 (lease -- optimistic and most likely) are better than rental. However, the lease-pessimistic AW ($-21,395) is slightly higher than the rental option ($-21,000).