Question

Mustang Auto​ Parts, Inc. is considering one of two forklift trucks for its assembly plant.

Truck A costs​ $15,000 and requires​ $3,000 annually in operating expenses. It will have a​ $5,000 salvage value at the end of its​ three-year service life.
Truck B costs​ $20,000, but requires only​ $2,000 annually in operating​ expenses; its service life is four​ years, at which time its expected salvage value will be​ $8,000.
The​ firm's MARR is​ 12%. Assuming that the trucks are needed for 12 years and that no significant changes are expected in the future price and functional capacity of each​ truck, select the most economical truck on the basis of AE analysis.

Answer 1

Truck A $7,763.50

Truck B $6,910.80

Truck B is more economical

Step-by-step explanation:

Calculation to select the most economical truck on the basis of AE analysis.

In order for us to find the equivalent annual cost of over 12years period what we should do is to find the annual equivalent cost of the first replacement cycle for both truck A and truck B.

Calculation for Truck A

In Truck A Four replacements will be needed

AE (12%) A= ($15,000 - $5,000) (A/P, 12%, 3)+ (0.12) ($5,000) + $3,000

Truck A= $7,763.50

Calculation for Truck B

In Truck B Three replacements will be needed

AE (12%)B= ($20,000 - $8,000) (A/P, 12%, 4)+ (0.12) ($8,000) + $2,000

Truck B= $6,910.80

Based on the above calculation Truck B is a more economical when compared to Truck A because it has lower or lesser amount of $6,910.80 than Truck A which has higher amount of $7,763.50