The city council of Morristown is considering the purchase of one new fire truck

Question

The city council of Morristown is considering the purchase of one new fire truck. The options are Truck X and Truck Y. The purchase is to be financed by money borrowed at 13% per year, which fire truck should be purchased? The appropriate financial data are as follows: Truck X Truck Y Capital investment Maintenance cost per year Useful life Reduction in fire damage per year $48,000 $7,000 7 years $20,000 $68,000 $4,500 7 years $22,000 Click the icon to view the interest and annuity table for discrete compounding when the MARR is 13% per year. Choose the correct choice below O A. Truck Y B. Truck x. O C. Neither Truck X nor Truck Y O D. Both Truck X and Truck Y

Explanation / Answer

Lets calculate NPV of 2 trucks as follows in an excel sheet

Truck X

Sum of PV = $9,493.94

Truck Y

Sum of PV's = NPV of Y = $9,395.68

Since NPV of truck X is higher than NPV of truck Y, we choose Truck X

Year Cash Flow PV 0           (48,000.00)       (48,000.00) 1             13,000.00         11,504.42 2             13,000.00         10,180.91 3             13,000.00           9,009.65 4             13,000.00           7,973.14 5             13,000.00           7,055.88 6             13,000.00           6,244.14 7             13,000.00           5,525.79

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