Question

A local county is considering purchasing some dump trucks for the trash pickups. Each truck will cost $55,000 and have an operating and maintenance cost that starts at $18,000 the first year and increases by $3,000 per year. Assume the salvage value is $12,000 at the end of 5 years and the interest rate is 10%. The equivalent annual cost of owning and operating each truck is most nearly equal to

Answer 1

35,972

Step-by-step explanation:

The equivalent annual cost can be calculated dividing NPV by the annuity factor

In order to find NPV first

Year1 Year2 Year3 Year4 Year5 Total

Operating and

Maintenance 18000 21000 24000 27000 30000 -

Discount factor(10%) 0.909 0.826 0.751 0.683 0.620 -

Discounted CFs 16362 17346 18024 18411 18600 88,713

Salvage 12000

Discount factor(10%) 0.620

Discounted salvage 7440 (7440)

Inital Cost (55,000) (55,000)

NPV 136,333

Calculation for EAC

NPV = 136,333

Annuity factor for 5 years = 3.790

Equivalent annual cost = NPV /Annuity factor

Equivalent annual cost = 136,333/3.790

Equivalent annual cost = 35,972