Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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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 4%. Please help this authority to decide which truck they should purchase.
|
Year |
Model A Truck |
Model B Truck |
|
Purchase Price (beginning of year) |
$90,000 |
$60,000 |
|
Annual Operation and Maintenance (end of year) 1 |
$10,000 |
$20,000 |
|
2 |
$10,000 |
$20,000 |
|
3 |
$10,000 |
$20,000 |
|
4 |
$10,000 |
$20,000 |
- The authority charges garbage collection fees from local residents. The estimated fee collection is $38,000 per year. Compare the
present value of total costs of the truck model you choose and the present value of total revenues. Calculate the present value of total benefit, thenet present value , and the benefit-cost ratio. Interpret what your results suggest. (2’)
*Results round to the nearest 2 decimal digits.
Present value of total benefits:
Net Present Value:
Benefit-Cost Ratio:
What do the net present value and the benefit-cost ratio suggest? Interpret the results.
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