Using the equivalent annual annuity approach

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Reference no: EM131517126

Mike Mulligan, CEO of Mulligan Excavation Inc, needs to replace Mary Anne, his old steam-driven shovel. Mike is looking at three used Caterpillar hydraulic excavators. Each alternative is a different model and each is a different age, and so each has a different expected working life and productive capability. Mike has produced estimates (in the table below) of the purchase price of each excavator and the associated after-tax cash flows that he expects to earn. Mike's cost of capital is 9.8%.

Using the equivalent annual annuity approach, which excavator should Mike purchase?

Cash flows for Hydraulic Excavators By Model (000)

Time 385 CL 365 CL 345 DL

0 -$135 -$112 -$117

1 55 95 45

2 69 44 36

3 35 68

4 32

NPV $20.78 $11.02 $5.21

The equivalent annual annuity for model 385 CL is___ thousand. (Round to two decimal places.)

The equivalent annual annuity for model 365 CL is __thousand. (Round to two decimal places.)

The equivalent annual annuity for model 345 DL is___ thousand. (Round to two decimal places.)

Reference no: EM131517126

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