CASE STUDY RESEARCH PAPER- REPORT ( 48 Hours - A+ Score Required)
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4.CONE-Presentation.pptxCase Study: Choosing the best alternative for PEAB CON E 430 – Spring 2015
Student: Mathias Loedding, Class ID: #12
Professor Hossein Hemati
Background
Peab is one of the largest contractors in Scandinavia. They want to invest in a pile diver they can use on their projects. Because of Norway's difficult and hard ground, they need one of the best piles divers on the market. They have good experiences with “Bauer RG 21 T Universal Piling Rig”. Unfortunately this is one of the markets most expensive machines, so its important to make the right decision.
This case study will analyze two different alternatives for this investment, and will end with a conclusion for what is the best alternative.
Alternatives
Rent the machine
Buy a new machine
Assumptions
Lifetime: 10 year
Annual interest rate: 6%
Bauer RG 21 T Universal Piling Rig
Alternative 1: Rent the machine
Initial cost, P = $20,000
Annual cost (Maintenance + Annual rent), A = $5,000 + $32,800 = $37,800
Interest rate, i = 6%
Lifetime, n = 10 yrs.
PW = -P – A (P/A, i, n)
= -$20,000 – ($37,800*7.360) = - $298,208
Alternative 2: Buy a new machine
Initial cost, P = $320,000
Annual cost (Maintenance), A = $5,000
Salvage value, S = $90,000
Interest rate, i = 6%
Lifetime, n = 10 yrs.
PW = -P – A (P/A, i, n) + S(P/F, i, n)
= -$320,000 – ($5000*7.360) + ($85,000*.5584) = - $309,336
Conclusion
The price for the two options is nearly the same but the rent alternative is a little cheaper. When you rent the machine you also have the benefits of service from the renter, and less risk.
My conclusion is that Peab should rent the pile diver instead of buying.
References
http://www.kynningsrud.no/forretningsomrader/fundamentering/
Engineering Economic Analysis, Eleventh edition. Newman, Eschenbach and Lavelle
