Determine which type of equipment company should purchase

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Reference no: EM13181625

A construction company is considering procuring one of two types of heavy construction equipment (A and B). Each type of equipment is expected to have a 5-year useful life with zero salvage value. Equipment A can be purchased at a cost of $30,000, while Equipment B would cost $55,000. The net cash flows for each type of equipment are given below.

(a) Using the conventional payback period approach, determine which type of equipment (A or B) the company should purchase.

(b) Consider the time value of money to be 12%. Use the benefit cost ratio approach and determine which type of equipment (A or B) the company should procure.

YEAR A B

0 -30,000$ -55,000$

1 6,000$ 24,000$

2 6,000$ 10,000$

3 12,000$ 21,000$

4 6,000$ -7,000$

5 25,564$ 26,610$

Reference no: EM13181625

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