A land development company is considering the purchase of earth-moving equipment. This equipment will have an estimated first cost of $190,000, a salvage value of $70,000, a life of 10 years, a maintenance cost of $40,000 per year, and an operating cost of $260 per day. Alternatively, the company can rent the neces­sary equipment for $1100 per day and hire a driver at $180 per day. (a) If the company’s MARR is 10% per year, how many days per year must the company need the equipment in order to justify its purchase? (b) When approached to rent for the breakeven number of days, the equipment owner indicated that the minimum rental is for 100 days per year; however, he might consider a lower daily rental cost. What is the daily rental cost to justify renting over pur­chasing? If the

Question

equipment was purchased, as­sume it would be used for the breakeven number of days. Use the Goal Seek or Solver tool to de­termine the required rental cost per day.

What will be an ideal response?

Answer 1

(a) Let x = days per year to just breakeven



-190,000(A/P,10%,10) -40,000 + 70,000(A/F,10%,10) -260x = -1100x - 180x

-190,000(0.16275) -40,000 + 70,000(0.06275) -260x = 1280x

1020x = 66,530

x = 65.22 days/year

The need must be 66 or more days per year to justify purchase

(b) Using Goal Seek is easier. Set up the annual cost using PMT with the breakeven days of 65.22 for the purchase option and 100 for the rent option. Changing cell is E12 and the display is:

Required rental cost is lower than $655 per day to justify rental