Question

You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $22,500 to purchase and which will have OCF of −$2,900 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $31,000 to purchase and which will have OCF of −$1,500 annually throughout that vehicle’s expected 4-year life. Both cars will be worthless at the end of their life. You intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future. If the business has a cost of capital of 13 percent, calculate the EAC.

Answer 1

Answer:

EAC of  Scion xA= 12,429.24

EAC of Toyota =   $11,922.02

The Toyota should selected because it has a lower EAC

Explanation:

Equivalent Annual cost = PV of cost/Annuity factor

Scion xA

PV of OCF= A × (1- (1+r)^(-n)/n

= 2,900 × (1 -(1.13)^(-3))/0.13=6847.342534

PV of total cost = 22,500 + 6847.34 = 29,347.34253

EAC = 29,347.34/ 2.361152598=  12429.24433

EAC = 12429.24

EAC Toyota

PV of OCF = 1500×(1 -(1.13)^(-4))/0.13= 4461.706988

PV of total cost = 31,000 + 4461.7069= 35,461.70699

EAC =  35,461.706/ 2.9744  = 11,922.02

EAC =  $11,922.02

EAC of  Scion xA= 12429.24

EAC of Toyota =   $11,922.02