Projects with different lives: Your company is deciding whether to purchase a durable delivery vehicle or a short-term vehicle. The durable vehicle costs $25,000 and should last five years. The short-term vehicle costs $10,000 and should last two years. If the cost of capital for the company is 15 percent, then what is the equivalent annual cost for the best choice for the company? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

We need to calculate the equivalent annual cost (EAC) for both options and choose the one with the lowest EAC.

For the durable vehicle:

Present value (PV) = -$25,000
Life (n) = 5 years
Cost of capital (r) = 15%

Using the formula for EAC, we get:

EAC = PV(F/P, 15%, 5) = -$7,457.71

For the short-term vehicle:

PV = -$10,000
n = 2 years
r = 15%

EAC = PV(F/P, 15%, 2) = -$6,151.42

Therefore, the best choice for the company is the short-term vehicle with an EAC of $6,151.42, as it has the lower EAC.

Projects with Different Lives: Your Company Is Deciding Whether to Purchase