Question

An independent contractor for a transportation company needs to determine whether she should upgrade the vehicle she currently owns or trade her vehicle in to lease a new vehicle. If she keeps her vehicle, she will need to invest in immediate upgrades that cost $4,900 and it will cost $1.700 per year to operate at the end of year that follows. She will keep the vehicle for 6 years at the end of this period, the upgraded vehicle will have a salvage value of $3,700. Alternatively, she could trade in her vehicle to lease a new vehicle. She estimates that her current vehicle has a trade-in value of $9.000 and that there will be $4,400 due at lease signing. She further estimates that it will cost $2.900 per year to lease and operate the vehicle. The independent contractor's MARRIS 11% Compute the EUAC of both the upgrade and lease alternatives using the insider perspective.

Answer 1

To determine whether the independent contractor should upgrade her current vehicle or trade it in to lease a new vehicle, we can calculate the Equivalent Uniform Annual Cost (EUAC) of both alternatives. The alternative with the lower EUAC is the more cost-effective option.

Step-by-step explanation:

In order to determine whether the independent contractor should upgrade her current vehicle or trade it in to lease a new vehicle, we can calculate the Equivalent Uniform Annual Cost (EUAC) of both alternatives. For the upgrade option, the initial investment is $4,900 for immediate upgrades, followed by annual operating costs of $1,700. At the end of 6 years, the upgraded vehicle will have a salvage value of $3,700.

For the lease alternative, the trade-in value of the current vehicle is $9,000, with $4,400 due at lease signing. The annual lease and operating costs are $2,900. The MARR is 11%, which will be used to calculate the EUAC.

To calculate the EUAC for each alternative, we discount all the cash flows to the present value and convert them to a uniform annual cost. The alternative with the lower EUAC is the more cost-effective option.