Question

A suburban taxi company is considering buying taxis with diesel engines instead of gasoline engines. The cars average 80,000 km a year. Use an annual cash flow analysis to determine the more 447 6-49 economical choice if interest is 6%.

Answer 1

Diesel engine taxis should be chosen.

Step-by-step explanation:

Useful life = 5 years

Annual distance covered = 80000 km

For a diesel car

Annual fuel cost = (80000/16)*.88 = $4400

Present value of total cost = vehicle cost + present value of the fuel cost + present value of annual repair cost + present value of annual premium – present value of resale value

Present value of total cost = 24000 + 4400*(1-1/1.06^5)/.06 + 900*(1-1/1.06^5)/.06 + 1000*(1-1/1.06^5)/.06 - 4000/1.06^5

Present value of total cost = $47548.86

Let, uniform annual cost = EUAC1

Then, EUAC1 = 47548.86/((1-1/1.06^5)/.06)

EUAC1 = $11287.93

For a gasoline car

Useful life = 4 years

Annual fuel cost = (80000/11)*.92 = $6690.91

Present value of total cost = vehicle cost + present value of the fuel cost + present value of annual repair cost + present value of annual premium – present value of resale value

Present value of total cost = 19000 + 6690.91*(1-1/1.06^4)/.06 + 700*(1-1/1.06^4)/.06 + 1000*(1-1/1.06^4)/.06 - 6000/1.06^4

Present value of total cost = $43322.83

Let, uniform annual cost = EUAC2

Then, EUAC2 = 43322.83/((1-1/1.06^4)/.06)

EUAC2 = $12502.6

Conclusion: The diesel engine taxis should be chosen because it offers relatively lower uniform annual cost compared to the gasoline engine taxis