Question

A small manufacturing company is evaluating trucks for delivering their products. Truck A has a first cost of $32,000. Its operating cost will be $5500 per year, and its residual value after 3 years will be $7000. Truck B hyas a first cost of $37,000, an operating cost of $5200 per year, and a resale value of $12,000 after 4 years. At an interest rate of 12%, which truck should be chosen?

Answer 1

To determine which truck to purchase, Truck A with a first cost of $32,000, operating cost of $5,500 per year, and a $7,000 residual value after 3 years, or Truck B with a $37,000 first cost, $5,200 operating cost per year, and $12,000 residual after 4 years, calculate the present value of total costs for each truck over their service life using the 12% interest rate.

Step-by-step explanation:

The question is about evaluating which truck, A or B, should be chosen by a small manufacturing company for delivering their products by comparing the initial costs, annual operating costs, and the residual values after certain years using a 12% interest rate for calculation. We need to calculate the present value of the costs for each truck to make a proper comparison.

For Truck A, the first cost is $32,000. The operating costs accumulate to $5,500 per annum, and after 3 years, the truck has a residual value of $7,000. Using the present value calculation which includes factoring in the 12% interest rate over 3 years, we can determine the cost of choosing Truck A. Truck B costs $37,000 initially with annual operating costs of $5,200, and a resale value of $12,000 after 4 years. The same calculation method applies to Truck B to compare both trucks effectively.

To assess which truck to purchase, the company should calculate the present value of the total costs incurred for each truck over their respective service lives (including first cost, operating cost, and resale value) and choose the truck with the lower present value of costs.