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 $13,000 to purchase and which will have OCF of -$1,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of -$550 annually throughout that vehicles expected five-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 12 percent, what is the EAC of each car? Scion xA: -$6,612.54; Toyota Prius: -$6,698.12 Scion xA: -$6,301.97; Toyota Prius: -$6,903.42 Scion xA: -$6,612.54; Toyota Prius: -$6,903.42 Scion xA: -$6,301.97; Toyota Prius: -$6,698.12 Scion xA: -$6,612.54; Toyota Prius: -$6,698.12 Scion xA: -$6,301.97; Toyota Prius: -$6,903.42 Scion xA: -$6,612.54; Toyota Prius: -$6,903.42 Scion xA: -$6,301.97; Toyota Prius: -$6,698.12 Scion xA: -$6,612.54; Toyota Prius: -$6,698.12 Scion xA: -$6,301.97; Toyota Prius: -$6,903.42 Scion xA: -$6,612.54; Toyota Prius: -$6,903.42 Scion xA: -$6,301.97; Toyota Prius: -$6,698.12

Explanation / Answer

To calculate an EAC, use the formula (Price * i) / (1 - (1 + i) ^ -n) + M

Scion's EAC: ($13,000 * 0.12) / (1 - (1 + 0.12) ^ -3) + $1,200 = $6,612.54

Prius' EAC: ($23,000 * 0.12) / (1 - (1 + 0.12) ^ -5) + $550 = $6,930.42

I don't think I have made an error in my calculation. I am guessing that the answer was incorrectly inputted. I believe the correct choice would be the third option.

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