Question

You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of −$550 annually throughout that vehicle's expected five-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 16 percent, what is the difference in the EAC of the two cars?

Multiple Choice

• $381.36

• $601.51

• $428.04

• $586.07

Answer 1

Answer:$586.07

In order to determine the EAC we first determine the NPV

The discount rate is given as 16%

For Scion

Life =3 years Initial investment =$13,000 the OCF=-$1200

The NPV can be determined using the excel formula=NPV(16%,B3:B5)+B2 we get NPV as -$15,695.07

For Prius

Life =5 years Initial Investment =-23,000

The OCF=-550

The NPV can be determined using the excel formula=NPV(16%,C3:C7)+C2 we get NPV as -$24800.86

EAC can be found by using the PMT()

The EAC for Scion =PMT(16%,3,-B8) we get EAC as -$6,988.35

The EAC for Toyota Prius =PMT(16%,5,-C8) we get EAC as -7,574.42

So the difference between the EACs =$-7574-(6988.35)=-586.06 that's $586.07(closest to the options)