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The Department of Corrections (DOC) needs to replace two of its prison transport buses. There are...

The Department of Corrections (DOC) needs to replace two of its prison transport buses. There are two companies that have a track record of making reliable vehicles, and both make a bus that meets the needs of the department. The DOC pays an 8% interest rate on money it borrows. The bus from Company A has a purchase price of $105,000 and a 10-year service life expectancy, and it averages $2,000 per year in maintenance costs. The bus from Company B has a purchase price of $110,000 and a 10-year service life expectancy, and it averages $1,500 per year in maintenance costs. Which bus should the Department of Corrections select?

Solutions

Expert Solution

We will determine the total net present value of the cost involved in purchase of two buses-

A. Net present value of first bus= (1,05,000+(2000 for 10 years @8%)=118420

B. Net present value of second bus= (110000)+(1500 for 10 years @ 8%)= 120065

Since the cost from Company A is lower than the company should be selecting company A bus.

jeff jeffy answered 2 years ago
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