OM Construction Company must choose between two types of cranes.Crane A costs $600,000, will last for five years, and will require $60,000 in maintenance each year.Crane B costs $750,000, will last for seven years, and will require $30,000 in maintenance each year.Maintenance costs for cranes A and B occur at the end of each year.The appropriate discount rate is 12 percent per year.Which machine should OM Construction purchase?
A)Crane A, because EAC is $226,444
B)Crane B, because EAC is $194,336
C)Crane A, because its PV is $816,286 (i.e., less than the PV of Project B)
D)The answer cannot be calculated because the revenues for the project are not given.

Question

OM Construction Company must choose between two types of cranes.Crane A costs $600,000, will last for five years, and will require $60,000 in maintenance each year.Crane B costs $750,000, will last for seven years, and will require $30,000 in maintenance each year.Maintenance costs for cranes A and B occur at the end of each year.The appropriate discount rate is 12 percent per year.Which machine should OM Construction purchase?
A)Crane A, because EAC is $226,444 
B)Crane B, because EAC is $194,336
C)Crane A, because its PV is $816,286 (i.e., less than the PV of Project B)
D)The answer cannot be calculated because the revenues for the project are not given.

Quizplus · Accepted Answer

To evaluate the two options, we need to find the Equivalent Annual Cost (EAC) of each crane. 
For Crane A, EAC = (600,000 + 60,000)/3.604 = 226,444
For Crane B, EAC = (750,000 + 30,000)/4.889 = 194,336
Since Crane B has a lower EAC, it is the better option. We do not need revenue information to make this decision.

OM Construction Company Must Choose Between Two Types of Cranes