Gateway Tours is choosing between two bus models. One is more expensive to purch
ID: 2716131 • Letter: G
Question
Gateway Tours is choosing between two bus models. One is more expensive to purchase and maintain but lasts much longer than the other. Its discount rate is 11.5%. The company plans to continue with one of the two models for the forseeable future. Based on the costs of each shown below, which should it choose? (Note: dollar amounts are in thousands.)
Based on the costs of each model, which should it choose?
1. Short & Sweet because the NPV of its costs is smaller
2. Short & Sweet because the equivalent annual annuity of its costs is smaller
3. Old Reliable because it lasts longer
4. Old Reliable because the equivalent annual annuity of its costs is smaller
Model Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Old Reliable -$198 -$4.1 -$4.1 -$4.1 -$4.1 -$4.1 -$4.1 -$4.1 Short & Sweet -$98 -$1.8 -$1.8 -$1.8 -$1.8Explanation / Answer
NPV cost of old Reliable=-$198-$4.1*PVAF for 7years @11.5%
=-$198-$4.1*4.6370=-$217
Equivalent annual annuity=-$217/4.1=-$46.8
NPV cost of old Short & Sweete=-$98-$1.8*PVAF for 4years @11.5%
=-$98-$1.8*3.07=-$103.53
Equivalent annual annuity=-$103.53/3.07=-$33.72
1)yes, we can chooose Short & sweer because NPV of its cost is smaller.
2) yes, we can choose Short & Sweet because the equivalent annual annuity of its costs is smaller.
3)we should supposed to choose
4)we should not supposed to choose
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