Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
- A local waste management company needs to purchase a new garbage truck. The company has two truck models under consideration. The purchase price for Model A is $90, 000. The maintenance and operation costs are $10,000/year. Model B is less expensive to acquire ($60,000 at purchase), but costs more on operation and maintenance. Details of the costs are shown in the table below. Interest rate is 4%. Please help this company to decide which truck they should purchase.
|
Year |
Model A Truck |
Model B Truck |
|
Purchase Price (beginning of year) |
$90,000 |
$60,000 |
|
Annual Operation and Maintenance (end of year) 1 |
$10,000 |
$20,000 |
|
2 |
$10,000 |
$20,000 |
|
3 |
$10,000 |
$20,000 |
|
4 |
$10,000 |
$20,000 |
|
|
|
|
- Calculate the present values of total costs for Model A Truck and Model B Truck, respectively. (Interest rate: 4%)
*Results round to the nearest 2 decimal places. (Note: you may consider using an Excel worksheet to do the calculation).
Present value of Model A Truck total costs:
Present value of Model B Truck total costs:
- Which truck model should this company choose? Why?
- The company charges garbage collection fees from local residents. The estimated fee collection is $38,000 per year. Compare the present value of total costs of the truck model you choose and the present value of total revenues. Calculate the present value of total benefit, the
net present value , and the benefit-cost ratio. Interpret what your results suggest.
*Results round to the nearest 2 decimal digits.
Present value of total benefits:
Net Present Value:
Benefit-Cost Ratio:
What do the net present value and the benefit-cost ratio suggest? Interpret the results.
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