A company is trying decide between two pickup trucks. One cost $19,200, has an a

Question

A company is trying decide between two pickup trucks. One cost $19,200, has an annual maintenance cost of $1,000, annual oil and gas cost of $2,500 that increases by $100 per year, and a salvage value of $8,000. The other cost $25,500, has an annual maintenance cost of $900, annual oil and gas cost of $1,200 that increases by 15% per year, and a salvage value of $10,000. What is the difference in annual cost of ownership between the two pickup trucks given a life of 8 years and 7% interest per year, e.g subtract the second choice from the first choice.

The answer is ?$4.95

Please show the work

Explanation / Answer

Annual cost of ownership = 562.60/((1-1/1.07^8)/7%) = $94.22

0 1 2 3 4 5 6 7 8 Initial cost -19200 Annual maintenance cost -1000 -1000 -1000 -1000 -1000 -1000 -1000 -1000 Annual oil and gas -2500 -2600 -2700 -2800 -2900 -3000 -3100 -3200 Salvage value 8000 Total cost -19200 -3500 -3600 -3700 -3800 -3900 -4000 -4100 3800 0 1 2 3 4 5 6 7 8 Initial cost -25500 Annual maintenance cost -900 -900 -900 -900 -900 -900 -900 -900 Annual oil and gas -1200 -1380 -1587 -1825.05 -2098.81 -2413.63 -2775.67 -3192.02 Salvage value 10000 Total cost -25500 -2100 -2280 -2487 -2725.05 -2998.81 -3313.63 -3675.67 5907.976 Difference -6300 1400 1320 1213 1074.95 901.1925 686.3714 424.3271 2107.976 NPV                                 562.60

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