a) A lawn service company uses a low-end mower for their yards. The mower costs
ID: 2800200 • Letter: A
Question
a) A lawn service company uses a low-end mower for their yards. The mower costs $2,000.00 initially, and then has an annual cost of $300.00 for gasoline and servicing. The company uses the mower for three years and then replaces with an identical model. The company has a 12.00% desired return on their investments.
What is the equivalent annual cost for the mower? (express as a negative)
b) A farmer is considering two different tractors for his business. Each tractor has a different price but also a different life span. The farmer will have to replace either tractor at the end of its useful life and start again. We will assume that the farmer has a discount rate of 10.00%.
MODEL A: Initial cost of $14,003.00, Yearly operating cost of $908.00 for 8.00 years. MODEL B: Initial cost of $12,010.00, Yearly operating cost of $1,532.00 for 9.00 years.
What is the NPV of buying tractor A?(HINT: This will be a negative number)
Explanation / Answer
a) Initial cost = -$2,000
annual cost = -$300
p/v to total cost = 2000 + 300 x cdf(12%,3years) = 2000 + 300 x 2.4018 = -$2,721
Therefore Equivalent annual cost = -$2721 / cdf(12%,3years) = -$1,133
Since both the questions are unrelated. Please post the questions seperated and we will be very happy to solve it. :)
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