In: Economics
A delivery car had a first cost of $32,000, an annual operating cost of $15,000, and an estimated $6000 salvage value after its 6-year life. Due to an economic slowdown, the car will be retained for only 2 years and must be sold now as a used vehicle. At an interest rate of 11% per year, what must the market value of the used vehicle be in order for its AW value to be the same as the AW if it had been kept for its full life cycle?
Case 1 - When delivery car is kept for its 6-year life
First cost = $32,000
Annual operating cost = $15,000
Salvage value = $6,000
Interest rate = 11%
Calculate the annual worth -
AW = -$32,000(A/P, 11%, 6) -$15,000 + $6,000(A/F, 11%, 6)
AW = (-$32,000 * 0.23638) - $15,000 + ($6,000 * 0.12638)
AW = -$7,564.16 - $15,000 + $758.28
AW = -$21,805.88
The annual worth of delivery car when kept for 6 year life is -$21,805.88
Case 2 - When car is retained for only 2 years
AW = -$32,000(A/P, 11%, 2) - $15,000 + MV(A/F, 11%, 2)
AW = (-$32,000 * 0.58393) - $15,000 + (MV * 0.47393)
AW = -$18,685.76 - $15,000 + 0.47393MV
AW = -$33,685.76 + 0.47393MV
The annual worth of car when retained for only 2 years was [-$33,685.76 + 0.47393MV].
Equating the both annual values -
-$21,805.88 = -$33,685.76 + 0.47393MV
-$21,805.88 + $33,685.76 = 0.47393MV
$11,879.88 = 0.47393MV
MV = $11,879.88/0.47393
MV = $25,066.74
The market value of the used vehicle must be $25,066.74.