urchase Price $90,000 $60,000 Annual Operation and Maintenance 1 $10,000 $20,000 2 $10,000 $20,000 3 $10,000 $20,000 4 $10,000 $20,000 Calculate the present values of total costs for Model A Truck and Model B Truck, respectively. (Interest rate: 3%) (1’) *Results round to the nearest 2 decimal places. (Note: you may consider u
- A local sanitation authority needs to purchase a new garbage truck. The authority has two truck models under consideration. The purchase price for Model A is $90, 000. The maintenance and operation costs are $10,000/year. Model B is less expensive to acquire ($60,000 at purchase), but costs more on operation and maintenance. Details of the costs are shown in the table below. Interest rate is 3%. Please help this authority to decide which truck they should purchase.
|
Year |
Model A Truck |
Model B Truck |
|
Purchase Price |
$90,000 |
$60,000 |
|
Annual Operation and Maintenance 1 |
$10,000 |
$20,000 |
|
2 |
$10,000 |
$20,000 |
|
3 |
$10,000 |
$20,000 |
|
4 |
$10,000 |
$20,000 |
|
|
|
|
- Calculate the present values of total costs for Model A Truck and Model B Truck, respectively. (Interest rate: 3%) (1’)
*Results round to the nearest 2 decimal places. (Note: you may consider using an Excel worksheet to do the calculation).
Present value of Model A Truck total costs:
Present value of Model B Truck total costs:
- Which truck model should this authority choose? Why? (0.5’)
- The authority charges garbage collection fees from local residents. The estimated fee collection is $35,000 per year. Calculate the present value of total benefit, the
net present value , and the benefit-cost ratio. Interpret what your results suggest. (2.5’)
*Results round to the nearest 2 decimal digits.
Present value of total benefits:
Net Present Value of Model A Truck:
Net Present Value of Model B Truck:
Benefit-Cost Ratio of Model A Truck:
Benefit-Cost Ratio of Model B Truck:
What do the net present value and the benefit-cost ratio suggest? Interpret the results. (1’)
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