Question 6 8 marks You are considering buying a new lawnmowe

Question 6: (8 marks) You are considering buying a new lawnmower. The choice is between Sears \"Lawn Guy\" mower and Canadian Tire\'s \"Clip Job\" mower. MARR is 5% and neither mower has a salvage value at the end of its life. First Cost Life Annual Gas Costs Annual Maintenance Lawn Guy 350 10 years $60 $30 Clip Job $210 4 years $40 $60 a) Determine which alternative is preferable. (5 marks) b) If a PW approach and a 4 year study period is used, what salvage value for the Lawn Guy mower would result in both alternatives being equally attractive? (3 marks)

Solution

Lawn Guy

Annual costs = 60 + 30 = $ 90

Present value of annual costs = 90 * Cumulative Present value factor @ 5% for 10 Years

   = 90 * 7.7217

= $ 695 (approx)

Net present value of total costs = 695 + 350

= $ 1045

Clip job

Annual costs = 40 + 60 = $ 100

Present value of annual costs = 100 * Cumulative Present value factor @ 5% for 4 Years

   = 100 * 3.5460 (approx)

= $ 354.6 i.e., $ 355 (approx)

Net present value of total costs = 355 + 210

= $ 565

Conclusion:- Clip Job is preferable as it is having present value of total costs just $ 565 as compared to Lawn guy which is having present value of total costs of $ 1045. Clip Job is preferable.