QUESTION 10 You are evaluating the purchase of a vehicle for your business. You\
ID: 2818894 • Letter: Q
Question
QUESTION 10
You are evaluating the purchase of a vehicle for your business. You've decided that the best choice is a car that will cost you $35,000, but you're uncertain how long you should plan on holding the car before you replace it. The table below lists the running costs and salvage value of the vehicle for each year.
What is the annual equivalent cost of replacing the vehicle every 3 years? Assume your cost of capital is 17.4%. Enter your answer to the nearest cent. Ignore taxes.
(Your answer will be a cost, and therefore a negative number. Don't forget the minus sign.)
Explanation / Answer
Annual Equivalent cost = - (Asset Price - salvage value)* Cost of capital/(1 - (1+ cost of capital)^(-number of year)) - running cost - salvage vale*cost of capital
= - (35000 - 15000) * .174/(1 - 1.174^-3) - 4000 - 15000*.174
= $15720.19
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