Type one: Purchase price per car $16,000; Annual operating expense per car $4,00
ID: 2623526 • Letter: T
Question
Type one: Purchase price per car $16,000; Annual operating expense per car $4,000; Disposition value per car $4,000; Estimated useful life of the car 4 years
Type two: Purchase price per car $32,000; Annual operating expense per car $3,600; Disposition value per car $5,500; Estimated useful life of the car 6 years
Type three: Purchase price $48,000; Annual operating expense $2,800; Disposition value $8,000; Estimated useful life of the asset 8 years
All cars can be replaced at the end of their asset lives. Using a 6.3 percent discount rate and the equivalent annuity method, which car is the better investment? Please show the NPV, and Equivalent annuity for each type of car.
NPV Equivalent Annuity
Car Type One ____________________ _____________
Car Type Two ____________________ _____________
Car Type Three ____________________ _____________
Which type of car should be chosen?______________________
Explanation / Answer
Since EAA is highets car 2, car 2 should be chosen.
EAA Year (1+r)^n Cash Flow Cash Flow/(1+r)^n 6061.041 0 1 -16000 -16000 1 1.063 -4000 -3762.935089 0.063 2 1.129969 -4000 -3539.920122 3 1.201157 -4000 -3330.12241 4 1.27683 -4000 -3132.758617 4 1.27683 4000 3132.758617 NPV -26632.97762 EAA Year (1+r)^n Cash Flow Cash Flow/(1+r)^n 6505.858 0 1 -32000 -32000 1 1.063 -3600 -3386.64158 0.063 2 1.129969 -3600 -3185.92811 3 1.201157 -3600 -2997.110169 4 1.27683 -3600 -2819.482755 5 1.35727 -3600 -2652.382648 6 1.442778 -3600 -2495.185935 6 1.442778 5500 3812.089622 NPV -45724.64157 EAA Year (1+r)^n Cash Flow Cash Flow/(1+r)^n 6024.757 0 1 -48000 -48000 1 1.063 -2800 -2634.054563 0.063 2 1.129969 -2800 -2477.944085 3 1.201157 -2800 -2331.085687 4 1.27683 -2800 -2192.931032 5 1.35727 -2800 -2062.964282 6 1.442778 -2800 -1940.700171 7 1.533673 -2800 -1825.682193 8 1.630295 -2800 -1717.480897 8 1.630295 8000 4907.088276 NPV -60275.75463 EAA = r (NPV) / 1 - (1 + r)-n where, EAA denotes Equivalent Annuity Cash Flow NPV denotes Net Present Value r denotes Rate Per Period n denotes Number of Periods.Related Questions
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