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Due to expanded growth in a certain portion of the city, a new waste truck capacity is needed
Due to expanded growth in a certain portion of the city, a new waste truck capacity is needed. An additional truck can be purchased now to replace the presently owned assets. The city uses a 5% interest rate for project evaluation. It is economically viable to buy the new waste truck?
New Model
Present value $72,000
Annual cost 12,500
Annual savings 31,000
Salvage value 7,200
Life in years 10
a) PW = 191,097.03
b) PW = -326,256.87
c) PW = 70,851.45
d) PW = $75,271.53
Expert Solution
Annual Cost=12500
Annual saving=31000
Net Saving=31000-12500
=18500
Present Value of Net Saving= Net saving* Annuity Factor (5%@10 years)
Annuity factor = (1- (1+ rate)^ -time period)/ rate
= (1- (1+ 5%)^ -10)/ 5%
= 7.72173
P.V of Net Saving=18500* 7.72173
= $ 142,852.01
Present Value of Salvage Value=7200/ (1.05^10)
= $4,420.18
PW= -Present Value+ P.V of Net Saving+ P.V of Salvage Value
PW = -72000+$ 142,852.01 +$4,420.18
= 75272.19
Answer is little different because of decimals. Option d. is closest so, PW will be $75,271.53.
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