1.You are trying to pick the least expensive car for your new delivery service.
ID: 2718780 • Letter: 1
Question
1.You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of -$1,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of -$550 annually throughout that vehicle's expected five-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 12 percent, what is the difference in the EAC of the two cars?
$317.88
$310.38
$413.25
$361.13
Explanation / Answer
Ans- $317.88
Scion xA, cost $13,000
Life 3 years
Cost of capital 12%
PVIF @12% for 3 years 2.402
Annual Cost =$13000/2.402 =$5412.16
Add-OCF $1200
Total annual cost $6612.16
Toyota Prius, cost $23,000
Life 5 years
Cost of capital 12%
PVIF @12% for 5 years 3.605
Annual Cost =$23000/3.605 =$6380.03
Add-OCF $550
Total annual cost $6930.03
The difference in the EAC of the two cars is (6930.03-6612.16)$317.87
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