Planning and Forecasting

Alfred Home Construction is considering the purchase of five dumpsters and a transport truck to store and transfer construction debris from building sites. The entire rig is estimated to have an initial cost of $125,000, a lifeof8 years, a $5000 salvage value, an operating costof$40 per day, and an annual maintenance cost of $2000. Alternatively, Alfred can obtain the same services from the city as needed at each construction site for an initial delivery cost of $125 per dumpster per site and a daily charge of $20 per day per dumpster. An estimated 45 construction sites will need debris storage throughout the average year. The minimum attractive rate of return is 12% per year.

(a) How many days per year must the equipment be required to just break even?

(b) If the expected usage is 75 days per year, which option- buy or lease-should be selected based on this economic analysis?

Determine the expected annual cost of this decision.

Solution:

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