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 $22,500 to purchase and which will have OCF of –$2,900 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $31,000 to purchase and which will have OCF of –$1,500 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 13 percent, calculate the EAC. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $22,500 to purchase and which will have OCF of –$2,900 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $31,000 to purchase and which will have OCF of –$1,500 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.

Explanation / Answer

Equivalent Annual cost under two options:

As the question has not correlated to savings by using either car, presuming that savings remains same in either car being and wokred out the EAC

Cost of capital @ 13%

YEAR 13% SCION XA DCF SCION XA TOYOTA PRIUS DCF TOYOTA

0 1 22500.00 22500.00 31000.00 31000.00

1 0.88 2900.00 2566.37 1500.00 1327.43

2 0.78 2900.00 2271.13 1500.00 1174.72

3 0.69 2900.00 2009.85 1500.00 1039.58

4 0.61 1500.00 919.98

TOTAL 29347.34 35461.71

EAC 9782.45 8865.43

TOYOTA PRIUS is beneficial

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