an initial cost of $50,000,000. The annual maintenance is $1,000,000 per year, each and every year of the 10 years life expectancy of the fleet. In addition, there will be a carbon emissions tax that starts at $250,000 in year 2, and increases by $250,000 each and every year after that.
an initial cost of $50,000,000. The annual maintenance is $1,000,000 per year, each and every year of the 10 years life expectancy of the fleet. In addition, there will be a carbon emissions tax that starts at $250,000 in year 2, and increases by $250,000 each and every year after that.
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
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- A Municipality needs a new fleet of busses. They have a choice between a diesel fuel powered fleet and a natural gas powered fleet. The Diesel fuel fleet has an initial cost of $50,000,000. The annual maintenance is $1,000,000 per year, each and every year of the 10 years life expectancy of the fleet. In addition, there will be a carbon emissions tax that starts at $250,000 in year 2, and increases by $250,000 each and every year after that. At the end of the ten years the busses can be sold for $5,000,000. The Natural Gas fleet can be purchased for $60,000,000. The annual maintenance is $800,000 per year. There is no carbon tax on the However, there is a 65% chance of a $5,000,000 one time “Special Maintenance cost at year 7. Because of certain toxic parts on the bus engines, the municipality will have to pay $5,000,000 and the end of the bus life to dispose of them. Use the
present value approach to determine which fleet is more cost effective. The cost of money is 6%
Expert Solution
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in this we have to calculate present value of both approaches and select best among them.
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