Question

A firm is trying to decide between two types of trucks, one a conventional gasoline vehicle...

A firm is trying to decide between two types of trucks, one a conventional gasoline vehicle and the other a diesel powered. The following information is available.

Gasoline Diesel
Initial Investment $27,000 $21,000
Useful life 4 years 3 years
Salvage value $9,000 $6,000
Operating cost per mile $0.42 $0.36

a) With interest at 5% per year, determine the annual mileage at which the two trucks are equivalent.

b) For 15,000 miles per year in travel, which truck should be recommended?

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Answer #1

i=5%

Let the miles driven be X then,

EUAC of gasoline = 27000(A/P,5%,4)+0.42X-9000(A/F,5%,4)

=27000(0.282012)+0.42X-9000(0.232012)

=7614.324+0.42X-2088.108

=5526.216+0.42X

EUAC of diesal = 21000(A/P,5%,3)+0.36X-6000(A/F,5%,3)

=21000(0.367209)+0.36X-6000(0.317209)

=7711.389+0.36X-1903.254

=5808.135+0.36X

The two trucks would be equivalent,

5526.216+0.42X = 5808.135+0.36X

0.42X-0.36X=5808.135-5526.216

0.06X=281.919

X=281.919/0.06

X=4698.65 miles

b) For 15000 miles per year in travel

EUAC of gasoline = 5526.216+0.42(15000) = 5526.216+6300 = 11826.216

EUAC of diesal = 5808.135+0.36(15000) = 5808.135+5400 = 11208.135

As the EUAC of diesal is less so it should be selected

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