A garage is comparing the cost of buying two different car hoists. Hoist A will

Question

A garage is comparing the cost of buying two different car hoists. Hoist A will cost $20,000, will require servicing of $1000 every two years, and last ten years. Hoist B will cost $15,000, require servicing of $800 per year, and last eight years. If the cost of capital is 7%, which is the better option, given that the firm has an ongoing requirement for a hoist?

Question 10 options:

1) Hoist A, since it has a greater present value (PV). 2) Hoist B, since it has a greater present value (PV). 3) Hoist A, since it has a greater equivalent annual annuity. 4) Hoist B, since it has a greater equivalent annual annuity.

Explanation / Answer

Since, we are comapring cost, we should opt for the option which has low present value

so , machine A = cost of machine + present value of cost at year2 + PV of cost at year 4 + PV of cost at year 6+ PV of cost at year 8 + PV of cost at year 10

=Cost + Servicing cost / (1+r)^2 + servicing cost/ (1+r)^4 +servicing cost / (1+r)^6 + servicing cost /(1+r)^8 + servicing cost / (1+r)^10

=20000+ 1000/1.07^2 +1000/1.07^4 +1000/1.07^6 + 1000/1.07^8 +1000/1.07^10

=20000 +873.4+762.9+6663.3+582+508.3 = 23393

873.4+

666.3 +

582.

The other alternative requires $800 cost each year for 8 years

Present value of cost = Initial cost + service cost PVIFA (r%,n)

                                  = 15000 + 800 PVIFA (7%,8)

                                   = 15000 + 4777.04 = 19777.04

The cost is lower under alternative 2, so it should be undertaken

873.4+

762.9+

666.3 +

582.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.