Engineering Economy 7th Edition by Leland Blank ,Anthony Tarquin

Exercise 1

The owner of a small construction company is planning to purchase specialized equipment to complete a contract he just received. The first cost of the equipment is $250,000, and it will likely have a salvage value of $90,000 in 3 years, at which time he will not need the equipment anymore. The operating cost is expected to be $75,000 per year. Alternatively, the owner can subcontract the work for $175,000 per year. Because the equipment is specialized, the owner is not sure about the salvage value. He thinks it might be worth as little as $10,000 in 3 years (a scrap value). If his minimum attractive rate of return is 15% per year, determine if the decision to buy the equipment is sensitive to the salvage value.