OM Construction Company must choose between two types of cranes. Crane A costs
$600,000, will last for 5 years, and will require $60,000 in maintenance each year. Crane B costs $750,000 and will last for seven years and will require $30,000 in maintenance each year. Maintenance costs for cranes A and B are incurred at the end of each year. The appropriate discount rate is 12% per year. Which machine should OM Construction purchase?
A) Crane A as EAC is $226,444
B) Crane B as EAC is $194,336
C) Crane A as the PV is $816,286
D) Cannot be calculated as the revenues for the project are not given

Question

Quizplus · Accepted Answer

We can find the equivalent annual cost (EAC) for both cranes using the formula:
EAC = (Initial cost + Annual maintenance cost) x Present value annuity factor
For Crane A: EAC = (600,000 + 60,000) x 3.604 = $226,444
For Crane B: EAC = (750,000 + 30,000) x 3.433 = $194,336
Since Crane B has the lower EAC, it is the better choice for OM Construction to purchase. The present value (PV) calculations are not necessary for this comparison. The option (D) about revenues is irrelevant for this cost comparison.

OM Construction Company Must Choose Between Two Types of Cranes