A coal stripping company currently operates three dozers for reclamation work. To reduce costs three alternatives are being considered for the future: rebuild the present equipment, purchase new dozers and employ a contractor. Details of the alternatives are given overleaf:
Rebuild Purchase Contractor
No of units required 3 2 N/A
Initial cost per unit $360,000 $920,000 $0
Annual costs per unit:
Maintenance $140,000 $85,000
Labour $240,000 $160,000 $525,000
Supplies $58,000 $42,000
Life 8 years 8 years 8 years
Salvage value per unit $0 $120,000 $0
If interest is 8% annually, which alternative should be selected?
Alternatives are depicted.