Southwestern Moving and Storage (SMS) buy a large-capacity trailer truck for $11

Question

Southwestern Moving and Storage (SMS) buy a large-capacity trailer truck for $115,000 to provide short-haul earth moving services. SMS is planning selling the truck in seven years for a price of $45,000. It is estimated that operating and maintenance costs for the truck averaged $9500 per year. A complete overhaul of the truck was done at the end of year 4 which cost an extra $3200. Considering an interest rate of 7% per year: Determine the engineering economy symbols and their value for each option. Construct the cash flow diagram Calculate the annual equivalent cost of the truck What is the Present worth of the truck

Explanation / Answer

(1)

relevant engineering economy symbols:

P/F (7%, 7) = 0.62

P/F (7%, 4) = 0.76

A/P (7%, 7) = 0.19

(2)

Cash flow diagram

(3)

Annual equivalent cost = $115,000 x A/P (7%, 7) + $9,500 + $3,200 x P/F (7%, 4) - $45,000 x P/F (7%, 7)

= $(21,850 + 9,500 + 2,432 - 27,900)

= $5,882

(4)

Present worth is calculated as follows.

Year Cash Flow ($) Discount Factor @7% Discounted Cash Flow ($) 0 -1,15,000 1.0000 -1,15,000 1 9,500 0.9346 8,879 2 9,500 0.8734 8,298 3 9,500 0.8163 7,755 4 12,700 0.7629 9,689 5 9,500 0.7130 6,773 6 9,500 0.6663 6,330 7 54,500 0.6227 33,940 Present Worth = -33,337

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