Question

Gateway Tours is choosing between two bus models. One is more expensive to purchase and maintain but lasts much longer than the other.​ Gateway's discount rate is 11.0%. The company plans to continue with one of the two models for the foreseeable future. Based on the costs of each shown​ below, which should it​ choose? ​ (Note: dollar amounts are thousands.)

Model	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Old Reliable	−$200	−$4.0	−$4.0	−$4.0	−$4.0	−$4.0	−$4.0	−$4.0
Short and Sweet	−$100	−$2.0	−$2.0	−$2.0	−$2.0

Based on the costs of each​ model, which should it​ choose?  ​(Select the best choice​ below.)

A. Gateway Tours should choose Old Reliable because it lasts longer.

B. Gateway Tours should choose Short and Sweet because the equivalent annual annuity of its costs is smaller.

C. Gateway Tours should choose Short and Sweet because the NPV of its costs is smaller.

D. Gateway Tours should choose Old Reliable because the equivalent annual annuity of its costs is smaller

Answer 1

Option B. Gateway Tours should choose Short and Sweet because the equivalent annual annuity of its costs is smaller.