The military is considering purchasing a new transport helicopter. It is believe

Question

The military is considering purchasing a new transport helicopter. It is believed the helicopter will be needed for 14 years. Helicopter 1 has an immediate purchase cost of $111,000; the annual maintenance is $3,000; and it can be salvaged for $18,000 at the end of its service life of 2 years. Helicopter 2 has an immediate acquisition cost of $119,000; the annual maintenance is $3,000; and it can be salvaged for $25,000 at the end of its service life of 7 years. Assume both helicopters can be purchased and operated repeatedly at the same costs. What is the annual equivalent cost of the helicopter that the military should purchase if the interest rate is 9.9%?"

Explanation / Answer

Equivalent cost of helicopter1:

Equivalent cost of helicopter 2:

Military should purchase helicopter2 with equivalent annual cost of 24720

Particulars Year 0 Year 1 Year 2 Investment 111000 Yearly costs 3000 3000 Salvage value -18000 Net cash flow 111000 3000 -15000 Discount factor@9.9% 1 0.910 0.828 Present value 111000 2730 -12419 A NPV 101310 B Annuity factor(9.9%, 2years) 1.738 A/B Equivalent cost 58296

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