QUESTION 10 You are evaluating the purchase of a vehicle for your business. You\

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. 1. Running Costs -3000 -3500 40004500 -5000 Salvage Value 25000 2000015000100005000 3. What is the annual equivalent cost of replacing the vehicle every 5 years? Assume your cost of capital is 16.4%. 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

Year Cash flows x DF at 16.4% =Present value 0 -35000 1          (35,000.00) 1 -3000 0.859106529            (2,577.32) 2 -3500 0.738064029            (2,583.22) 3 -4000 0.634075626            (2,536.30) 4 -4500 0.54473851            (2,451.32) 5 0 0.467988411                            -   NPV          (45,148.17) Year 5 cash flow = -5000(cost) +5000(Salvage value) = 0 Annual equivalent cost = = -45148.17 ÷ 3.24397 $      (13,917.57)

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