Warren Tea needs new tires for his Escalade. He researches the Internet and find
ID: 2507051 • Letter: W
Question
Warren Tea needs new tires for his Escalade. He researches the Internet and finds the following alternatives:
Warranty (mos) Cost
TireA 12 39.95
TireB 24 59.95
TireC 36 69.95
TireD 48 90.00
Automotive engineer Warren figures that the warranty period is a good estimate of the life of the tire. Using a MARR of 10% and annual cash flow, what is the AC of the cheapest option, to the nearest cent?
Explanation / Answer
Tire A :
Annuity Factor = (1 -(1/1.1))/0.1 = 0.909
AC = 39.95/0.909 = $ 43.945
Tire B:
Annuity Factor = (1 -(1/1.1)^2)/0.1 = 1.7355
AC = 59.95/1.7355 = $34.54
Tire B:
Annuity Factor = (1 -(1/1.1)^3)/0.1 = 2.4868
AC = 69.95/2.4868 = $ 28.12
Tire B:
Annuity Factor = (1 -(1/1.1)^4)/0.1 = 3.1698
AC = 90/3.1698 = $28.39
ans is Tire A = $43.95
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