3) (35 points) EmKay Carriers has decided to replace one of its aging trucks. Th

Question

3) (35 points) EmKay Carriers has decided to replace one of its aging trucks. The company is deciding between purchasing and leasing a new truck. Currently the truck has a market value of $75,000. Because of rapidly changing government requirements and regulations, the company has decided to use a planning-horizon of 5 ycars A new truck can be purchased for $250,000 and has a useful life 15 years. Its market value at the end of 5 years is expected to be $125,000, and it is expected to have an annual operating and maintenance cost of $25,000 A new truck can be leased for S35,000 per year, payable at the beginning of the year, plus operating costs are expected to be $10,000 per year, payable at the end of the ycar In either option, the company expects to sell the existing truck at its market value. Based on an annual cost comparison over a 5-year planning horizon, determine if EmKay Carriers should buy or lease a new truck, given MARR is 10% per year compounded annually

Explanation / Answer

(i) Option 1 - New truck is purchased

Net first cost ($) = Cost of truck - Trade0in value = 250,000 - 75,000 = 175,000

PW of costs for 5 years ($) = 175,000 + 25,000 x P/A(10%, 5) - 125,000 x P/F(10%, 5)

= 175,000 + 25,000 x 3.7908** - 125,000 x 0.6209** = 175,000 + 94,770 - 77,612.5

= 192,157.5

(ii) Option 2 - New truck is leased

Initial (year 0) income = Trade-in price = $75,000

PW of costs for 5 years ($) = - 75,000 + 10,000 x P/A(10%, 5) + 35,000 x P/A(10%, 5) x 1.10#

= - 75,000 + 10,000 x 3.7908** + 38,500 x 3.7908** = - 75,000 + 37,908 + 145,945.8

= 108,853.8

Since PW of costs is lower for Lease option, the new truck should be leased.

**From P/A and P/F factor tables

#Since lease amount is payable at beginning of year, this is an annuity due and is multiplied by (1 + Interest rate) = (1 + 0.1) = 1.10

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