A pest control company can purchase a commercial truck for $50,000. It is estima
ID: 2740962 • Letter: A
Question
A pest control company can purchase a commercial truck for $50,000. It is estimated that the life and salvage value of the truck will be 6 years and $5,000 respectively. Operating expenses are estimated to be $50 per day for every day the truck is used, and maintenance will be performed under contract for $2,000 per year. As an alternative, a commercial truck can be rented at an average cost of $125 per day. If the annual interest rate is 15%, should the firm buy the truck or rent it if the company operates for 250 working days per year. Use an annual cost comparison. (DO NOT USE EXCEL)
Explanation / Answer
Purchase option:
Depreciation per annum:
= ($50,000-$5,000)÷6
= $7,500
Total costs under purchasing option:
= $7,500+$50×250+$2,000
= $22,000
Hiring charges per annum:
= $125×250
= $31,250
Annual costs are lesser in purchasing option.
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