You are trying to pick the least-expensive car for your new delivery service. Yo
ID: 2728908 • Letter: Y
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 $15,500 to purchase and which will have OCF of –$1,500 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $22,000 to purchase and which will have OCF of –$800 annually throughout that vehicle’s expected 4-year life. Both cars will be worthless at the end of their life. 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.
If the business has a cost of capital of 12 percent, calculate the EAC. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)
Scion's EAC $ Toyota's EAC $
Explanation / Answer
Considering 12 years time cycle to compare the EAC Scion xA Toyota Prius Year PV factor @12% Purchase cost OCF Net Cash flow PV of Costs Purchase cost OCF Net Cash flow PV of Costs Year 1 0.893 15,500 1,500 17,000 15,179 22,000 800 22,800 20,357 Year 2 0.797 1,500 1,500 1,196 800 800 638 Year 3 0.712 1,500 1,500 1,068 800 800 569 Year 4 0.636 15,500 1,500 17,000 10,804 800 800 508 Year 5 0.567 1,500 1,500 851 22,000 800 22,800 12,937 Year 6 0.507 1,500 1,500 760 800 800 405 Year 7 0.452 15,500 1,500 17,000 7,690 800 800 362 Year 8 0.404 1,500 1,500 606 800 800 323 Year 9 0.361 1,500 1,500 541 22,000 800 22,800 8,222 Year 10 0.322 15,500 1,500 17,000 5,474 800 800 258 Year 11 0.287 1,500 1,500 431 800 800 230 Year 12 0.257 1,500 1,500 385 800 800 205 Total 6.1944 44,983.4 45,015.2 Annuity factor for EAC = 6.1944 EAC of ScionxA=44983.4/6.1944= $ 7,261.94 EAC of Toyota Prius=45015.2/6.1944= $ 7,267.10
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