22) Evaluation of alternative investments (5 points) cars The franchise owner is

Question

22) Evaluation of alternative investments (5 points) cars The franchise owner is chise of Merry Maids, a cleaning service company, is looking to buy new cars. The franchise owner is considering two expected to last f models: 2017 Ford Focus Electric for $29,000 or 2017 Ford Focus Gas for $20,000. Both models are or 10 years and will have no value thereafter. The electric model is projected to cost about $200 per year in electricity, while th capital is 7% APR. If expenses are expected to be the same for e gas model will cost about $1,000 in gas expenses per year. The firm's weighted average cost of the cost of electricity and gas are not expected to change over time, and all other car ownership both models, which model should the franchise purchase and why? Make sure to itative evidence to support your recommendation.

Explanation / Answer

Net present cost of Electric=29000+200/1.07200/1.07^2+200/1.07^3.......+200/1.07^10=29000+200/0.07*(1-1/1.07^10)=30404.7
Net present cost of Gas=20000+1000/1.07+1000/1.07^2+1000/1.07^3.......+1000/1.07^10=20000+1000/0.07*(1-1/1.07^10)=27023.6

As we see Gas net prsent cost is less than Electric, Gas should be preferred

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