A firm can lease a truck for 3 years at a cost of $48,000 annually. It can inste

Question

A firm can lease a truck for 3 years at a cost of $48,000 annually. It can instead buy a truck at a cost of $98,000, with annual maintenance expenses of $28,000. The truck will be sold at the end of 3 years for $38,000.

What is the equivalent annual cost of buying and maintaining the truck if the discount rate is 10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

A firm can lease a truck for 3 years at a cost of $48,000 annually. It can instead buy a truck at a cost of $98,000, with annual maintenance expenses of $28,000. The truck will be sold at the end of 3 years for $38,000.

Explanation / Answer

Total cost = Purchase cost + present value of maintainance cost of 3years -Present value of salavge value

              = 98,000 + (2.48685 * 28000 ) -(.75131 * 38000)

              = 98000 + 69631.86 - 28549.78

            = $ 139,082.08

Equivalent Annual cost ofBuying and maintaining = Total cost / PVAF@10%,3years

                                                                       = 139,082.08 / 2.48685

                                                                       = $ 55,927 (approx)

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