Question

You are considering purchasing a dump truck. The truck will cost $45,000 and have an operating and maintenance cost that starts at $15,000 the first year and increases by $2,000 per year thereafter. Assume that the salvage value at the end of 5 years is $9,000 and interest rate is 12%. The equivalent annual cost of owning and operating the truck is most nearly:

Answer 1

Answer:

The equivalent annual cost of owning and operating the truck is most nearly:

= $29,616.

Explanation:

a) Data and Calculations:

                                                    Costs          PV Factor       Present Value

Year 0 Truck purchase           $45,000          1                       $45,000

Year 1  Operating &

           maintenance cost          15,000          0.893                  13,395

Year 2 O&M cost                       17,000          0.797                  13,549

Year 3 O&M cost                       19,000          0.712                  13,528

Year 4 O&M cost                       21,000          0.636                 13,356

Year 5 O&M costs                    23,000          0.567                  13,041

Year 5 Salvage value                -9,000          0.567                  -5,103

Total costs                                                                             $106,766

Annuity factor at 12% after 5 years = 3.605

Equivalent annual cost = $29,616 ($106,766/3.605)