The Department of Corrections (DOC) needs to replace two of its prison transport

Question

The Department of Corrections (DOC) needs to replace two of its prison transport buses. There are two companies that have a track record of making reliable vehicles, both make a bus that meets the needs of the department. The DOC pays 8% interest rate on money it borrows. The bus from Company Ahas a pruchase price of $105,000 and a 10-year service life expectancy, and it averages $2,000 per year in maintence costs. THe bus from Company B has a purchase price of $110,000 and a 10-year service life expectancy, and it averages $1,500 per year in maintenance costs. Which bus should the Department of Corrections Select?

** how is this done in Excel What formual should be used and how should the numbers be entered. Thanks

Explanation / Answer

Cash flow PV of cash flows Year A B PV Factor A B 0 105000 110000 1 105000 110000 1 2000 1500 0.925926 1851.851852 1388.888889 2 2000 1500 0.857339 1714.677641 1286.00823 3 2000 1500 0.793832 1587.664482 1190.748362 4 2000 1500 0.73503 1470.059706 1102.544779 5 2000 1500 0.680583 1361.166394 1020.874796 6 2000 1500 0.63017 1260.339254 945.2544403 7 2000 1500 0.58349 1166.980791 875.2355929 8 2000 1500 0.540269 1080.537769 810.4033268 9 2000 1500 0.500249 1000.497934 750.3734507 10 2000 1500 0.463193 926.3869762 694.7902321 total pv of outflow 118420.1628 120065.1221 A Should be selected as it has lower PV of cash outflows U can use PV Formula instead- For that Cash flow PV of cash flows Year A B A B 0 105000 110000 -105000.0000 -110000.0000 1 to 10 2000 1500 -13420.1628 -10065.1221 total pv of outflow -118420.1628 -120065.1221 formula PV(8%,10,2000) PV(8%,10,1500) Please provide feedback…. Thanks In advance :-)

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