Engineering Economy 7th Edition by Leland Blank ,Anthony Tarquin

Exercise 41

Apple Crisp Foods signed a contract some years ago for maintenance services on its fleet of trucks and cars. The contract is up for renewal now for a period of 1 year or 2 years only. The contract quote is $300,000 per year if taken for 1 year and $240,000 per year if taken for 2 years. The finance vice president wants to renew the contract for 2 years without further analysis, but the vice president for engineering believes it is more economical to perform the maintenance in-house. Since much of the fleet is aging and must be replaced in the near future, a fixed 3-year study period has been agreed upon. The estimates for the in-house (challenger) alternative are as follows: The effective tax rate is 35%, and the after-tax MARR is 10% per year. Perform an after-tax AW analysis, and determine which vice president has the better economic strategy over the next 3 years.