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    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?

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    Solution Summary

    Alternatives are depicted.