3 EAC Approach You are trying to pick the least-expensive car for your new deliv

Question

3 EAC Approach You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $14,000 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 $20,000 to purchase and which will have OCF of $650 annually throughout that vehicle’s expected 4-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, which one should you choose? (LG12-7)

Explanation / Answer

Calculation of EAC

Car Scion xA has lower EAC, thus the purchase of car Scion xA is recommended.

Scion xA Toyota Prius Purchase cost 14000 20000 Life 3 years 4 years Annual cash outflows 1200 650 Cumulative PVF @12% 2.402 3.037 Present Value of all cash outflows 16882 21974 / Cumulative PVF @12% 2.402 3.037 EAC 7028 7235

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