Nancy\'s Notions pays a delivery firm to distribute its products in the metro ar

Question

Nancy's Notions pays a delivery firm to distribute its products in the metro area. Delivery costs are $30,000 per year. Nancy can buy a used truck for $10,000 that will be adequate for the next 3 years. Operating and maintenance costs are estimated to be $25,000 per year. At the end of 3 years, the used truck will have an estimated salvage value of $3,000. Nancy's MARR is 24 percent/year.

a) What is the annual worth of this investment?

b) What is the decision rule for juding the attractiveness of investments based on annual worth?

c) Should Nancy buy the truck?

Explanation / Answer

EAC for asset capital cost = (P - S) (A/P,i%,N) + Si , where P = 10,000 and s = 3000, i =24%, n = 3

= (10,000 - 3,000)(A/P,24%,3) + (3,000) ( 0.24 )

= 3,533.05 + 720

= $4,253.03 per year

EAC of operating cost

=  (25000)(A/P,24%,3)

= 12,617.96

Total cost = 4253.03 + 12617.96

= 16870.99

Which is less then 30,000 so nancy should buy the truck

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