Millennium Freight is evaluating the possibility of adding a new shipping route, which would require an acquisition of a new delivery vehicle, with several models available. If accepted, the new route is expected to be serviced for many years, and therefore an infinite life can be assumed for the analysis in parts b) and c) below. Assume minimum attractive rate of return of 14%. Pease include a written answer with each part of the question. a) Calculate the present worth of the new route assuming the El Grande vehicle model is chosen. The purchase price of the vehicle is $250,000; the vehicle will require annual maintenance and operating costs of $12,000; it is expected to be sold for $70,000 in 10 years. The new route is expected to result in additional annual net revenues of $62,000. Calculate the present worth of the new route for the 10-year period of one cycle. Explain whether the new route should be accepted or rejected and why. b) Assume the management ultimately decides to consider two vehicle models for the new route, the El Grande from part a), and Bandito. Assume the vehicle model choice has no impact on revenues (ignore revenues, and only compare costs and the salvage values). The Bandito model purchase price is $350,000, its annual maintenance and operating costs are $9,000, and it is expected to be used for 15 years, and then sold for $100,000. Assuming whichever model is chosen, the vehicle will be replaced with the same model (same cash flows) when sold, use the Least Common Multiple method in conjunction with the Present Worth method to determine which of the two models should be chosen. Explain your answer. c) Repeat part b), except this time, use the Annual Worth method, instead of the Least Common Multiple - Present Worth method. Explain your answer again.
Millennium Freight is evaluating the possibility of adding a new shipping route, which would require an acquisition of a new delivery vehicle, with several models available. If accepted, the new route is expected to be serviced for many years, and therefore an infinite life can be assumed for the analysis in parts b) and c) below. Assume minimum attractive rate of return of 14%. Pease include a written answer with each part of the question. a) Calculate the present worth of the new route assuming the El Grande vehicle model is chosen. The purchase price of the vehicle is $250,000; the vehicle will require annual maintenance and operating costs of $12,000; it is expected to be sold for $70,000 in 10 years. The new route is expected to result in additional annual net revenues of $62,000. Calculate the present worth of the new route for the 10-year period of one cycle. Explain whether the new route should be accepted or rejected and why. b) Assume the management ultimately decides to consider two vehicle models for the new route, the El Grande from part a), and Bandito. Assume the vehicle model choice has no impact on revenues (ignore revenues, and only compare costs and the salvage values). The Bandito model purchase price is $350,000, its annual maintenance and operating costs are $9,000, and it is expected to be used for 15 years, and then sold for $100,000. Assuming whichever model is chosen, the vehicle will be replaced with the same model (same cash flows) when sold, use the Least Common Multiple method in conjunction with the Present Worth method to determine which of the two models should be chosen. Explain your answer. c) Repeat part b), except this time, use the Annual Worth method, instead of the Least Common Multiple - Present Worth method. Explain your answer again.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Millennium Freight is evaluating the possibility of adding a new shipping route, which would require an
acquisition of a new delivery vehicle, with several models available. If accepted, the new route is
expected to be serviced for many years, and therefore an infinite life can be assumed for the analysis in
parts b) and c) below. Assume minimum attractive rate of return of 14%. Pease include a written answer
with each part of the question.
a) Calculate the present worth of the new route assuming the El Grande vehicle model is chosen. The
purchase price of the vehicle is $250,000; the vehicle will require annual maintenance and operating
costs of $12,000; it is expected to be sold for $70,000 in 10 years. The new route is expected to result in
additional annual net revenues of $62,000. Calculate the present worth of the new route for the 10-year
period of one cycle. Explain whether the new route should be accepted or rejected and why.
b) Assume the management ultimately decides to consider two vehicle models for the new route, the El
Grande from part a), and Bandito. Assume the vehicle model choice has no impact on revenues (ignore
revenues, and only compare costs and the salvage values). The Bandito model purchase price is
$350,000, its annual maintenance and operating costs are $9,000, and it is expected to be used for 15
years, and then sold for $100,000. Assuming whichever model is chosen, the vehicle will be replaced
with the same model (same cash flows) when sold, use the Least Common Multiple method in
conjunction with the Present Worth method to determine which of the two models should be chosen.
Explain your answer.
c) Repeat part b), except this time, use the Annual Worth method, instead of the Least Common
Multiple - Present Worth method. Explain your answer again.
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