Jake’s Shipping, Inc. needs to purchase a new fleet of light trucks for its shipping business. The firm is trying to decide whether to purchase trucks with diesel engines or trucks with gasoline engines. The diesel truck will have a useful life of 12 years, after which it will need to be replaced. The diesel truck costs $110,000 to purchase and its annual maintenance and operation costs will depend on the cost of regular maintenance/repairs and the cost of diesel fuel. In Years 1 through 5, its annual maintenance/repair costs are expected to be $2000 per year. In Years 6 through 12, its annual maintenance/repair costs are expected to be $2500 per year. The firm expects that the diesel truck will use 5,900 gallons of diesel fuel per year (Years 1 through 12) and believes that diesel fuel will cost $2.65 per gallon, on average, during the life of the truck. The gasoline truck only costs $60,000 to purchase but will have a useful life of only 4 years, after which it will need to be replaced. The gasoline truck’s annual maintenance/repair costs are expected to be $1,700 per year in Years 1 and 2 and $2,000 per year in Years 3 and 4. The gasoline truck will use 6,100 gallons of gasoline per year (Years 1 through 4), and the firm expects gasoline to cost $2.45 per gallon, on average, during the life of the truck. For simplicity, assume that both truck types will have no salvage value at the end of their lives. Which truck would the firm choose if it bases its decision on Equivalent Annual Cost (EAC)? Assume a discount rate of 8%.
Jake’s Shipping, Inc. needs to purchase a new fleet of light trucks for its shipping business. The firm is trying to decide whether to purchase trucks with diesel engines or trucks with gasoline engines. The diesel truck will have a useful life of 12 years, after which it will need to be replaced. The diesel truck costs $110,000 to purchase and its annual maintenance and operation costs will depend on the cost of regular maintenance/repairs and the cost of diesel fuel. In Years 1 through 5, its annual maintenance/repair costs are expected to be $2000 per year. In Years 6 through 12, its annual maintenance/repair costs are expected to be $2500 per year. The firm expects that the diesel truck will use 5,900 gallons of diesel fuel per year (Years 1 through 12) and believes that diesel fuel will cost $2.65 per gallon, on average, during the life of the truck. The gasoline truck only costs $60,000 to purchase but will have a useful life of only 4 years, after which it will need to be replaced. The gasoline truck’s annual maintenance/repair costs are expected to be $1,700 per year in Years 1 and 2 and $2,000 per year in Years 3 and 4. The gasoline truck will use 6,100 gallons of gasoline per year (Years 1 through 4), and the firm expects gasoline to cost $2.45 per gallon, on average, during the life of the truck. For simplicity, assume that both truck types will have no salvage value at the end of their lives. Which truck would the firm choose if it bases its decision on Equivalent Annual Cost (EAC)? Assume a discount rate of 8%.
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