5-22) the city transit authority(cta) is trying to decide between rail cars manu

Question

5-22) the city transit authority(cta) is trying to decide between rail cars manufactured by French corp and japan rail car. The French corp cars cost more to buy initially but they are expected to last for ten years. The japan rail cars are cheaper initially but they will wear out in six years. The cash flows related to each of the choices are presented below. If the CTA’s cost of capital is 10% which type of car should the cta buy? Support you answer.

Year French corp japan rail car
0 (275,000) (195,000)
1 (10,000) (15,000)
2 (10,000) (15,000)
3 (10,000) (15,000)
4 (10,000) (15,000)
5 (10,000) (15,000)
6 (10,000) (15,000)
7 (10,000)
8 (10,000)
9 (10,000)
10 (10,000)
Total (375,000) (285,000)

Explanation / Answer

Net present cost for French corp= -$336,445.67 Net present cost for japan rail car = -$260,328.91 so, japan rail car should be chosen as it has low net present cost

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