The Stark County executives are considering the purchase of

The Stark County executives are considering the purchase of new 130 hp bulldozer and are comparing two models: the BEHEMOTH and the GOLIATH. The BEHEMOTH bulldozer costs $130,000, with a projected annual operating and maintenance cost of $31,000 and a salvage value $15,000 after 7 years. The GOLIATH model costs $175,000, with a projected annual operating and maintenance cost of $22,000 and a salvage value of $21,000 after 7 years.

Calculate the net present value of the BEHEMOTH compressor and the net present value of the GOLIATH compressor, with the cash flows discounted annually at 12%. Which model should be purchased?

Solution

BEHEMOTH:

Initial Cost = $130,000
Annual Cost = $31,000
Salvage Value = $15,000
Life of Project = 7 years

NPV = -$130,000 - $31,000 * PVIFA(12%, 7) + $15,000 * PVIF(12%, 7)
NPV = -$130,000 - $31,000 * 4.5638 + $15,000 * 0.4523
NPV = -$264,693.30

GOLIATH:

Initial Cost = $175,000
Annual Cost = $22,000
Salvage Value = $21,000
Life of Project = 7 years

NPV = -$175,000 - $22,000 * PVIFA(12%, 7) + $21,000 * PVIF(12%, 7)
NPV = -$175,000 - $22,000 * 4.5638 + $21,000 * 0.4523
NPV = -$265,905.30

The company should choose neither of the project since both will incur enormous loss.