A used tower crane has an initial cost of $250,000. In Year 3 and Year 6, the equipment will require major maintenance, at a cost of $16,000 each time. The annual operating cost for the equipment is $24,000, and it has a salvage value of $33,000 in Year 9.
-Find the net present value of the equipment if the cash flows are discounted annually at 7%.
A)-$412,138
B)-$395,374
C)-$372,575
D)-$385,473
E)-$406,201

Question

Quizplus · Accepted Answer

The correct answer is A because the net present value of the equipment is -$412,138. This is calculated by taking the initial cost of the equipment ($250,000) and adding the present value of the maintenance costs ($16,000 x 2 x 1/(1+0.07)^3 + 1/(1+0.07)^6) and the present value of the annual operating costs ($24,000 x 1/(1+0.07) + 1/(1+0.07)^2 + 1/(1+0.07)^3 + 1/(1+0.07)^4 + 1/(1+0.07)^5 + 1/(1+0.07)^6 + 1/(1+0.07)^7 + 1/(1+0.07)^8) and subtracting the present value of the salvage value ($33,000 x 1/(1+0.07)^9).

A Used Tower Crane Has an Initial Cost of $250,000