You are starting a family pizza parlor and need to buy a motorcycle for delivery
ID: 2625549 • Letter: Y
Question
You are starting a family pizza parlor and need to buy a motorcycle for delivery orders. You have two models in mind. Model A costs $9,300 and is expected to run for 6 years; model B is more expensive, with a price of $15,800 and has an expected life of 9 years. The annual maintenance costs are $810 for model A and $740 for model B. Assume that the opportunity cost of capital is 9 percent. Calculate EAC for both the models and choose which one should you buy?
The EAC of Model A is $ The EAC of Model B is $Explanation / Answer
EAC for Model A = 9300/Annuity factor for 6 years and 9% + 810 = 9300/4.49 + 810 = $2,883.15
EAC for Model B = 15800/Annuity factor for 9 years and 9% + 740 = 15800/6.00 + 740 = $3,375.42
As EAC is lower for model A, it should be selected over Model B
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