The city of Johannesburg needs to maintain its 125 police cars. At present it has a contract with a local garage to do regular repair works and other routine maintenance works. The garage bills the city about R1100 per car per year. As an alternative, the town is considering owning a small garage with two mechanics. The town has to spend R150000 to buy the garage and furnish it. The annual cost of operating and maintaining the garage is about R60000. In addition to the above expenses, another R500/car/year has to be spent on parts and other accessories. The garage has an estimated service life of 20 years and a salvage value of R50,000. Use an interest rate of 6% per annum to determine whether the investment in buying the city’s own garage is justifiable. Use NPV calculations to evaluate your decision.
The city of Johannesburg needs to maintain its 125 police cars. At present it has a contract with a local garage to do regular repair works and other routine maintenance works. The garage bills the city about R1100 per car per year. As an alternative, the town is considering owning a small garage with two mechanics. The town has to spend R150000 to buy the
garage and furnish it. The annual cost of operating and maintaining the garage is about R60000. In addition to the above expenses, another R500/car/year has to be spent on parts and other accessories. The garage has an estimated service life of 20 years and a salvage value of R50,000. Use an interest rate of 6% per annum to determine whether the investment in buying the city’s own garage is justifiable. Use
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