### Decision Making for Selecting Bus Models: Cost Analysis **Scenario**: Gateway Tours is choosing between two bus models. One model is more expensive to purchase and maintain but lasts much longer than the other. Gateway's discount rate is 11.3%. The company plans to continue with one of the two models for the foreseeable future. Based on the costs of each model as shown here, which should it choose? (Note: dollar amounts are in thousands.) **Question**: Based on the costs of each model, which should it choose? (Select the best choice below.) **Options**: - **A.** Gateway Tours should choose Old Reliable because it lasts longer. - **B.** Gateway Tours should choose Short and Sweet because the NPV of its costs is smaller. - **C.** Gateway Tours should choose Short and Sweet because the equivalent annual annuity of its costs is smaller. - **D.** Gateway Tours should choose Old Reliable because the equivalent annual annuity of its costs is smaller. --- #### **Data Table** | Model | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | |----------------|--------|--------|--------|--------|--------|--------|--------|--------| | **Old Reliable** | -199 | -3.9 | -3.9 | -3.9 | -3.9 | -3.9 | -3.9 | -3.9 | | **Short and Sweet** | -98 | -1.8 | -1.8 | -1.8 | -1.8 | | | | **Explanation of the data:** - **Old Reliable** has an initial cost of $199,000 in Year 0 and annual maintenance costs of $3,900 for each of the subsequent seven years. - **Short and Sweet** has an initial cost of $98,000 in Year 0 and annual maintenance costs of $1,800 for each of the next four years. --- **Analysis Considerations**: 1. **Net Present Value (NPV)**: Calculate the present value of each model's costs over their respective time frames taking into account the 11.3% discount rate. 2. **Equivalent Annual Annuity (EAA)**: Determine the annual cost of
### Decision Making for Selecting Bus Models: Cost Analysis **Scenario**: Gateway Tours is choosing between two bus models. One model is more expensive to purchase and maintain but lasts much longer than the other. Gateway's discount rate is 11.3%. The company plans to continue with one of the two models for the foreseeable future. Based on the costs of each model as shown here, which should it choose? (Note: dollar amounts are in thousands.) **Question**: Based on the costs of each model, which should it choose? (Select the best choice below.) **Options**: - **A.** Gateway Tours should choose Old Reliable because it lasts longer. - **B.** Gateway Tours should choose Short and Sweet because the NPV of its costs is smaller. - **C.** Gateway Tours should choose Short and Sweet because the equivalent annual annuity of its costs is smaller. - **D.** Gateway Tours should choose Old Reliable because the equivalent annual annuity of its costs is smaller. --- #### **Data Table** | Model | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | |----------------|--------|--------|--------|--------|--------|--------|--------|--------| | **Old Reliable** | -199 | -3.9 | -3.9 | -3.9 | -3.9 | -3.9 | -3.9 | -3.9 | | **Short and Sweet** | -98 | -1.8 | -1.8 | -1.8 | -1.8 | | | | **Explanation of the data:** - **Old Reliable** has an initial cost of $199,000 in Year 0 and annual maintenance costs of $3,900 for each of the subsequent seven years. - **Short and Sweet** has an initial cost of $98,000 in Year 0 and annual maintenance costs of $1,800 for each of the next four years. --- **Analysis Considerations**: 1. **Net Present Value (NPV)**: Calculate the present value of each model's costs over their respective time frames taking into account the 11.3% discount rate. 2. **Equivalent Annual Annuity (EAA)**: Determine the annual cost of
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
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Transcribed Image Text:### Decision Making for Selecting Bus Models: Cost Analysis
**Scenario**: Gateway Tours is choosing between two bus models. One model is more expensive to purchase and maintain but lasts much longer than the other. Gateway's discount rate is 11.3%. The company plans to continue with one of the two models for the foreseeable future. Based on the costs of each model as shown here, which should it choose? (Note: dollar amounts are in thousands.)
**Question**: Based on the costs of each model, which should it choose? (Select the best choice below.)
**Options**:
- **A.** Gateway Tours should choose Old Reliable because it lasts longer.
- **B.** Gateway Tours should choose Short and Sweet because the NPV of its costs is smaller.
- **C.** Gateway Tours should choose Short and Sweet because the equivalent annual annuity of its costs is smaller.
- **D.** Gateway Tours should choose Old Reliable because the equivalent annual annuity of its costs is smaller.
---
#### **Data Table**
| Model | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 |
|----------------|--------|--------|--------|--------|--------|--------|--------|--------|
| **Old Reliable** | -199 | -3.9 | -3.9 | -3.9 | -3.9 | -3.9 | -3.9 | -3.9 |
| **Short and Sweet** | -98 | -1.8 | -1.8 | -1.8 | -1.8 | | | |
**Explanation of the data:**
- **Old Reliable** has an initial cost of $199,000 in Year 0 and annual maintenance costs of $3,900 for each of the subsequent seven years.
- **Short and Sweet** has an initial cost of $98,000 in Year 0 and annual maintenance costs of $1,800 for each of the next four years.
---
**Analysis Considerations**:
1. **Net Present Value (NPV)**: Calculate the present value of each model's costs over their respective time frames taking into account the 11.3% discount rate.
2. **Equivalent Annual Annuity (EAA)**: Determine the annual cost of
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