You are purchasing a new set of rims for your vehicle. The first alternative is

Question

You are purchasing a new set of rims for your vehicle. The first alternative is an aluminum rim. The aluminum rims cost $2000 initially. These rims have no annual costs or salvage value, and lasts 6 years. The second alternative is a stainles steel rim. The stainless steel set cost $3500 initially. These rims have $150 costs for up keep every 3 years. It has a salvage value of $500 at the end of its 9-year life. Interest is a nominal 10% per year compounded monthly. Use present worth analysis given to decide on a set of rims.

Explanation / Answer

Alternative 1

Cost of aluminium rims =$2000

Equivalent annual cost =( Cost+PV of annual costs-PV of salvage value )/PVIAF(10%,6years)

=($2000-0-0)/ 4.533=$441.21

Alternative 2

Cost of stainless steel sets = $3500

PV of annual costs =$150*PVIAF(10%,3Years)+$150*PVIAF(10%,6Years)+$150*PVIAF(10%,9years)

=$150*2.4869+$150*4.533+$150*5.759 =$1916.835

PV of salvage value =$500*PVIF(10%,9years) =500*0.4241 =$212.05

Equivalent annual cost =( Cost+PV of annual costs-PV of salvage value )/PVIAF(10%,9years)

   =($3500+1916.835-212.05)/5.759 =$903.765

Alternative 1 using aluminum rim is having a lower equivalent cost when compared to stain less steel rims.

So it is advised to purchase aluminium rims.

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