Bus company Moon City Bus Lines purchased 20 buses over the past five years for $...

Bus company Moon City Bus Lines purchased 20 buses over the past five years for $ 22,000 each. The president of the company plans to carry out major repairs on these during the next year in the amount of $ 2500 each bus.

However, the vice president proposed to exchange these 20 buses for 25 new, smaller ones. The current value of the old buses is $ 6,000, the new models cost $ 22,500 per unit. The President estimates the lifespan of current buses to be another 8 years. He also mentioned that the annual operating costs of existing buses are $ 3,000 per bus and that a residual value of $ 800 each seems reasonable. We also plan to make $ 1,800 in additional income per bus per year with the new models.

The vice president estimates that with the new buses, the operating costs will be $ 1,500 less per year per bus, the lifespan will also be 8 years and the residual value will be $ 2,500 per bus. Determine the most economical decision to make if the rate is 10% per year using the equivalent annual value method

ps: use the ask method, show the calculations and make the money flow diagram

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Expert Solution

ekkarill92 answered 1 year ago

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