Question

In: Finance

You are trying to pick the least-expensive car for your new delivery service. You have two...

You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $16,500 to purchase and which will have OCF of −$1,700 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $24,000 to purchase and which will have OCF of −$900 annually throughout that vehicle’s expected 4-year life. Both cars will be worthless at the end of their life. 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. If the business has a cost of capital of 13 percent, calculate the EAC. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Solutions

Expert Solution

Solution :

The EAC of Scion xA = - $ 8,688.11

The EAC of Toyota Prius = - $ 8,968.66

Since, Scion xA has a lower EAC of - $ 8,688.11, it should be picked over Toyota Prius.

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

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jeff jeffy answered 1 year ago
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