A forklift will last for only 2 more years. It costs $5,000 a year to maintain. For $20,000 you can buy a new lift that can last for 10 years and should require maintenance costs of only $2,000 a year. a-1. Calculate the equivalent cost of owning and operating the forklift if the discount rate is 4% per year. (Do not round intermediate calculations. Round your answer to 2 decimal places.) a-2. Should you replace the forklift

The equivalent cost of owning and operating the forklift is $4,465.82

We should replace the forklift.

Explanation:

The Equivalent annual cost can be calculated using the following formula

Equivalent annual cost = PV of cost / Annuity factor

Old forklift

PV of Cost = Annual cost x 2 years Annuity factor at 4% / 2 years Annuity factor at 4%

Hence

PV of cost = Annual cost = $5,000

New forklift

10 years Annuity factor at 4% = 1 - ( 1 + 4%)^-10 )/4% = 8.11090

PV of cost = ( Annual Cost x 10 years Annuity factor at 4% ) + Initial cost

PV of cost = ( $2,000 x 8.11090 ) + $20,000

PV of cost = 16,221.79 + $20,000

PV of cost = 36,221.79

Placing values in the formula

Equivalent annual cost = $36,221.79 / 8.11090

Equivalent annual cost = $4,465.82

As the equivalent annual cost of the new lift is lower than the the old one, we should replace the forklift

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rational decision making is a multi-step process for making choices between alternatives. the process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight. the word “rational” in this context does not mean sane or clear-headed as it does in the colloquial sense.

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