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 $14,500 to purchase and which will have OCF of –$1,300 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $20,500 to purchase and which will have OCF of –$700 annually throughout that vehicle’s expected 4-year life. Both cars will be worthless at the end of their life. 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. If the business has a cost of capital of 11 percent, calculate the EAC.

Scion's EAC

Toyota's EAC

Explanation / Answer

Answer:-

Scion's EAC

Find NPV First

Year Cashflows

0       ($14,500)

1       ($1,300)

2       ($1,300)

3      ($1,300)

Expected life = 3, COC = 11%

NPV = -14,500-1,300/(1.11)^1-1,300/(1.11)^2-1,300/(1.11)^3 = ($17,676.83)

Find EAC , N= 3, COC = 11%, PV = ($17,677)

=pmt(rate,nper,pv,fv,type) = $7,233.59 = Scion's EAC

Toyota's EAC

Find NPV First

Year Cashflows

0       ($20,500)

1       ($700)

2       ($700)

3      ($700)

4     ($700)

Expected life = 4, COC = 11%

NPV = -20,500-700/(1.11)^1-700/(1.11)^2-700/(1.11)^3-700/(1.11)^4 = ($22,671.72)

Find EAC , N= 4, COC = 11%, PV = ($22,672)

=pmt(rate,nper,pv,fv,type) = $7,307.69 = Toyota's EAC

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