You are trying to pick the least-expensive car for your new delivery service. Yo

Question

You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $15,000 to purchase and which will have OCF of -$1,600 annually throughout the vehicle's expected life of four years as a delivery vehicle; and the Toyota Prius, which will cost $27,000 to purchase and which will have OCF of -$750 annually throughout that vehicles expected six-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 10 percent, what is the EAC of the most expensive car?

Explanation / Answer

Hi, if you like my answer please rate me life-saver first. for Scion xA Assuming OCF = other cash flows Total expected cost = $15000 + $1600 * (I + I^2 + ... I^4) = $20,071.78 for Toyota Prius Assuming OCF = other cash flows Total expected cost = $27000 + $750 * (I + I^2 + ... I^6) = $30,266.45 so toyota prius is the more expensive one.

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