Question

Calculate and report and valid present worth measures using the listed interest for all the three options given below. What is the name of the best option economically?

	Dakota	Delta	Derby
Interest	8%	8%	8%
Purchase	127,000	79,000	102,000
Annual Revenue	44,800	48,600	94,400
Annual Expenses	44,800	48,600	94,400
Salvage	4,000	2,500	6,500
Life	6	6	6

Answer 1

PVAF = [1- (1+r)-n ] / r

PW -For Dakota

PW = - Purchase + Annual Revenue (PVAF,8%,6) -  Annual Expenses(PVAF,8%,6) + Salvage

= - 127,000 + 44,800 [1- (1+r)^-n ] / r - 44,800 [1- (1+r)^-n ] / r + 4,000

cancelling out annual revenue and annual expence because both values are same and PVAF is also same so the present value of both Annual revenue and expence ase same so cancells out

= - 127,000 + 4000

= - 123,000

is the present value cost For Dakota

PW -For Delta

PW = - Purchase + Annual Revenue (PVAF,8%,6) -  Annual Expenses(PVAF,8%,6) + Salvage​​​​​​​

= - 79,000+ 48,600[1- (1+r)^-n ] / r - 48,600[1- (1+r)^-n ] / r + 2,500

cancelling out annual revenue and annual expence because both values are same and PVAF is also same so the present value of both Annual revenue and expence ase same so cancells out

= - 79,000+ 2,500

= - 76,500

is the present value cost For Dakota

PW -For Derby

PW = - Purchase + Annual Revenue (PVAF,8%,6) -  Annual Expenses(PVAF,8%,6) + Salvage​​​​​​​

= - 102,000+ 94,400[1- (1+r)^-n ] / r - 94,400[1- (1+r)^-n ] / r + 6,500

cancelling out annual revenue and annual expence because both values are same and PVAF is also same so the present value of both Annual revenue and expence ase same so cancells out

= - 102,000+ 6,500

= - 95,500

Best option Economically is delta as the cost of the delta is is lowest of all above i.e 76,500