Knott's Berry Farm is contemplating buying a new van for its operations. The farm's engineering staff has researched the market and found 2 units that appear to meet their requirements. Truck # 1 has a cost of $37,000 and requires an annual maintenance cost of $2,700. At the end of its useful life (3 years), it is projected to have a salvage value of $5,000. On the other hand, Truck #2 has an initial cost of $40,000 and requires only $2,000 in annual operating costs because the manufacturer is claiming that some routine maintenance is covered in the price of the truck. Truck # 2 has an estimated salvage value of $8,000 at the end of its 4 year service life. The CEO has determined that the farm's MARR is 12%. The trucks are needed for 12 years according to the 2024 Strategic Plan. The Engineering Department has determined that no significant changes are needed in the future that would change prices and functional characteristics of each truck. As a member of the Engineering Department, select the more economical truck for the farm on the basis of AE analysis. Be sure to justify your answer, making it clear enough for both the Engineering and General Management staff members to understand.
Knott's Berry Farm is contemplating buying a new van for its operations. The farm's engineering staff has researched the market and found 2 units that appear to meet their requirements. Truck # 1 has a cost of $37,000 and requires an annual maintenance cost of $2,700. At the end of its useful life (3 years), it is projected to have a salvage value of $5,000. On the other hand, Truck #2 has an initial cost of $40,000 and requires only $2,000 in annual operating costs because the manufacturer is claiming that some routine maintenance is covered in the price of the truck. Truck # 2 has an estimated salvage value of $8,000 at the end of its 4 year service life. The CEO has determined that the farm's MARR is 12%. The trucks are needed for 12 years according to the 2024 Strategic Plan. The Engineering Department has determined that no significant changes are needed in the future that would change prices and functional characteristics of each truck. As a member of the Engineering Department, select the more economical truck for the farm on the basis of AE analysis. Be sure to justify your answer, making it clear enough for both the Engineering and General Management staff members to understand.
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
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Transcribed Image Text:Knott's Berry Farm is contemplating buying a new van for its operations. The farm's engineering
staff has researched the market and found 2 units that appear to meet their requirements. Truck
# 1 has a cost of $37,000 and requires an annual maintenance cost of $2,700. At the end of its useful
life (3 years), it is projected to have a salvage value of $5,000. On the other hand, Truck #2 has an
initial cost of $40,000 and requires only $2,000 in annual operating costs because the manufacturer
is claiming that some routine maintenance is covered in the price of the truck. Truck # 2 has an
estimated salvage value of $8,000 at the end of its 4 year service life. The CEO has determined that
the farm's MARR is 12%. The trucks are needed for 12 years according to the 2024 Strategic Plan.
The Engineering Department has determined that no significant changes are needed in the future
that would change prices and functional characteristics of each truck. As a member of the
Engineering Department, select the more economical truck for the farm on the basis of AE analysis.
Be sure to justify your answer, making it clear enough for both the Engineering and General
Management staff members to understand.
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