Delta Dawn’s Bakery is considering purchasing a new van to deliver bread. The va

Question

Delta Dawn’s Bakery is considering purchasing a new van to deliver bread. The van will cost $18,500. Two-thirds ($12,333) of this cost will be borrowed. The loan is to be repaid with four equal annual payments (first payment at t = 1) based on an interest rate of 4 %/year. It is anticipated that the van will be used for 6 years and then sold for a salvage value of $500. Annual operating and maintenance expenses for the van over the 6-year life are estimated to be $700 per year. If the van is purchased, Delta will realize a cost savings of $4,000 per year. Delta uses a MARR of 6%/year. What is the present worth of the van?

Explanation / Answer

Amount borrowed = $12333
Downpayment = 18000 - 12333 = 5667

Monthly instalment = 12333 (A/P, 4%, 4) = 12,333 (0.2755) = 3397.74

Present value of costs:

PWC = Downpayment + present value pf 3397.74 paid every year for 4 years + present value of 700 incurred every year for 6 years
= 5667 + 3397.74 (P/A, 6%, 4) + 700(P/A, 6%, 6) = 5667 + 3397.74 (3.465) + 700 (4.917) = 20882.07

Present value of benefits:

PWB = $4000 saved each year for 6 years + $500 realised after 6 years
= 4000 (P/A, 6%, 6) + 500 (P/F, 6%, 6)
= 4000 (4.917) + 500 (0.7050)
= $20020.50

(Net) present worth = PWB - PWC = $20,020.50 - $20,882.07 = -861.57

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.