- 2065 Chaitra · 6 marks
Purchase or hire construction equipment
Short answer
Annual equivalent cost of purchase = 10,00,000(A/P,12%,10) − 1,00,000(A/F,12%,10) = Rs 1,71,286. Hire cost is Rs 1,25,000 per year. Hire is cheaper by Rs 46,286 per year; choose hiring.
A construction company needs an equipment which costs Rs 10,00,000 and has salvage value of Rs. 1,00,000 at the end of 10 years. The equipment supplier is also willing to provide the equipment on hire for Rs 1,25,000 per year for 10 years. What will you do? Purchase or Hire. MARR = 12%.
Compare the annual equivalent cost of owning the equipment with the yearly hire charge over the same 10 years at MARR = 12%.
Cash-flow diagram (purchase, Rs):
year 0 1 ... 9 10
−10,00,000 0 ... +1,00,000 (salvage)
Hire: −1,25,000 at the end of each of years 1 to 10.
Annual cost of purchase
AEC(purchase) = P(A/P,12%,10) − S(A/F,12%,10)
(A/P,12%,10) = 0.17698 (A/F,12%,10) = 0.05698
= 10,00,000(0.17698) − 1,00,000(0.05698)
= 176,984 − 5,698
= Rs 171,286 per year
Annual cost of hire
AEC(hire) = Rs 1,25,000 per year.
| Option | Annual equivalent cost (Rs) |
|---|---|
| Purchase | 171,286 |
| Hire | 1,25,000 |
PW check: PW(hire) = 1,25,000(P/A,12%,10) = 1,25,000(5.6502) = Rs 706,278; PW(purchase) = 10,00,000 − 1,00,000(P/F,12%,10) = Rs 967,803.
Answer: Hire the equipment. It costs Rs 1,25,000 per year against Rs 171,286 per year for buying, a saving of about Rs 46,286 per year (assuming no other operating cost differences).
✓ Answer checked by Claude Opus 5.5 (high effort)
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