A recent graduate who wants to start an excavation/earth-moving business is trying to determine which size of used dump truck to buy. He knows that as the bed size increases, the net income increases, but he is uncertain whether the incremental expenditure required for the larger trucks is justified. The cash flows associated with each size truck are estimated below. The contractor has established a MARR of 18% per year, and all trucks are expected to have a remaining economic life of 5 years. (a) Determine which size truck he should purchase. (b) If two trucks are to be purchased, what should be the size of the second truck?
These are revenue alternatives; add DN
(a) 8 vs. DN: 0 = -30,000(A/P,i*,5) + (26,500 – 14,000) + 2000(A/F,i*,5)
Solve for i* by trial and error or spreadsheet
i* = 31.7% (spreadsheet)
Eliminate DN
10 vs. 8: 0 = -4000(A/P,?i*,5) + (14,500 – 12,500) + 500(A/F,?i*,5)
?i* = 42.4%
Eliminate 8
15 vs. 10: 0 = -4000(A/P,?i*,5) + (15,500 – 14,500) + 500(A/F,?i*,5)
?i* = 10.9%
Eliminate 15
20 vs. 10: 0 = -14,000(A/P,?i*,5) + (19,500 – 14,500) + 1000(A/F,?i*,5)
?i* = 24.2%
Eliminate 10
25 vs. 20: 0 = -9000(A/P,?i*,5) + (23,000 – 19,500) + 1100(A/F,?i*,5)
?i* = 29.0%
Eliminate 20
Purchase 25 m³ truck
(b) For second truck, purchase truck that was eliminated next to last: 20 m³
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