Question: Your firm’s discount rate is 15 percent. You are considering the purch

Question

Question:

Your firm’s discount rate is 15 percent. You are considering the purchase of Truck A or Truck B. Truck A costs $100, has a useful life of 3 years, no salvage value and maintenance costs of $10 per year. Truck B costs $80, has a useful life of 2 years, no salvage value and maintenance costs of $15 per year. Which truck should you select and why?

Possible answers:

A. Truck A because the EAC of -53.8 is less than Truck B’s EAC of -64.2

B. Truck A because the NPV of 123 if larger than B’s NPV of 104

C. Truck B because the EAC of 64.2 is greater than Truck A’s EAC of 53.8

Explanation / Answer

Solution:

Therefore, the answer is A. Truck A because the EAC of -53.8 is less than Truck B’s EAC of -64.2

Truck A Year 0 Year 1 Year 2 Year 3 Purchase Price 100 Maintenance 0 10 10 10 PVIF(15%) 1 0.870 0.756 0.658 Present value 100 8.696 7.561 6.575 Total Cost - 122.83 EAC = Total present value of Outflows / PVAF(15%,3 years) - 53.80

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