You are trying to pick the least-expensive car for your new delivery service. Yo

Question

You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $15,000 to purchase and which                    will have OCF of -$2,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $28,000 to                    purchase and which will have OCF of -$650 annually throughout that vehicles expected four-year life. Both cars will be worthless at the end of their life. If                    you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your                    business has a cost of capital of 13 percent, what is the EAC of the least expensive car?

Explanation / Answer

for Scion xA
Assuming OCF = other cash flows
Total expected cost = $15000 + $2200 * (I + I^2 + ... I^4) = $20,450

for Toyota Prius
Assuming OCF = other cash flows
Total expected cost = $28000 + $650 * (I + I^2 + ... I^6) = $30,300
so toyota prius is the more expensive one.

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