Question

A pizza company is currently paying its drivers $.30 per mile to drive their own cars on deliveries. The Company is thinking about buying its own delivery vehicle which would cost $25,000 with an estimated 4 year life, a net salvage of $5,000, taxes and insurance at a cost of $1000 per year and operating and maintenance expenses of $.020 per mile. If the interest rate is 8% and the company anticipates an employee will average 25,000 miles per year, what is the equivalent cost per mile? (neglect income tax.)

Answer 1

We have the following information

First Cost ($)	25,000
Annual Taxes and Insurance ($)	1,000
Annual Operating and Maintenance Cost ($) at the rate of $0.020 per mile for average 25,000 miles per year	0.020 × 25,000 = 500
Salvage Value ($)	5,000
Useful life (n)	4 years
Interest rate (i)	8% or 0.08

Equivalent uniform annual cost (EUAC) = First Cost(A/P, i, n) + Annual Taxes and Insurance + Annual Operating and Maintenance Cost – Salvage Value(A/F, i, n)

EUAC = 25000(A/P, 8%, 4) + 1000 + 500 – 5000(A/F, 8%, 4)

EUAC = 25000[0.08(1 + 0.08)⁴/((1 + 0.08)⁴ – 1)] + 1000 + 500 – 5000[0.08/((1 + 0.08)⁴ – 1)]

EUAC = 7548.02 + 1500 – 1109.60

EUAC = $7938.42

Dividing EUAC by 25,000 will give us equivalent cost per mile.

Equivalent cost per mile = 7938.42/25000

Equivalent Cost Per Mile = $0.32