You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $15,000 to purchase and which will have OCF of -$1,600 annually throughout the vehicle's expected life of four years as a delivery vehicle; and the Toyota Prius, which will cost $27,000 to purchase and which will have OCF of -$750 annually throughout that vehicle's expected six-year life. Both cars will be worthless at the end of their life. If 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, and if your business has a cost of capital of 10 percent, what is the EAC of the most expensive car?

Question

Quizplus · Accepted Answer

The EAC of the most expensive car is -$6,949.40. This is calculated by finding the present value of the OCFs for each car and then dividing the difference between the two present values by the difference in the number of years of life.PV of OCFs for Scion xA = -$1,600 * (1 - (1 + 0.1)^-4) / 0.1 = -$5,868.30PV of OCFs for Toyota Prius = -$750 * (1 - (1 + 0.1)^-6) / 0.1 = -$4,081.10Difference in PV of OCFs = -$5,868.30 - (-$4,081.10) = -$1,787.20Difference in number of years of life = 6 - 4 = 2EAC = -$1,787.20 / 2 = -$6,949.40

You Are Trying to Pick the Least Expensive Car for Your