Question

Nancy’s Notions pays a delivery firm to distribute its products in the metro area. Delivery costs are $31,500 per year. Nancy can buy a used truck for $8,000 that will be adequate for the next 3 years. Operating and maintenance costs are estimated to be $24,000 per year. At the end of 3 years, the used truck will have an estimated salvage value of $3,200. Nancy’s MARR is 25%/year.

Answer 1

Solution :-

In case of Outsource Delivery

Annual Cost = - $31,500

In case of Buy truck

Present Worth of Costs of 3 Years = [ - $8,000 - $24,000 * PVAF ( 25% , 3 ) + $3,200 * PVF ( 25% , 3 ) ]

= [ - $8,000 - ( $24,000 * 1.952 ) + ( $3,200 * 0.512 ) ]

= - $53,209.60

Now Annual Cost = Present cost * A/P ( r , n )

= - $53,209.60 * A/P ( 25% , 3 )

= - $53,209.60 * 0.5123

= - $27,259

As the Annual Cost in case of Buying truck is lower , So choose option to buy truck

If there is any doubt please ask in comments

Thank you please rate