Question

Whispering Pines Golf Club is trying to decide the best course of action for its fleet of new golf carts. Whispering Pines can buy premium tires (today) at a cost of $1,000 per cart. These tires last four years and then must be replaced. The second option is to buy regular tires at a cost of $510 (today) and replace them every two years. It is expected the prices for the tires will not change. A cart is expected to last sixteen years at which time it is replaced. Using a discount rate of 3%, determine the better option for the cost of tires for the sixteen-year economic life of the golf cart.

Answer 1

To compare the two options, all cash outflows need to be discounted to today at the discount rate of 3%. The formula to discount a cash flow is:

where,

• C is the cash flow
• r is the discount rate
• n is the time period at which the cash flow happens

Then all present values are summed up to get the total present value of cost of an option.

The computations are as shown below:

So, the regular tyres option costs less and should be pursued.