Question

) A garage is comparing the cost of buying two different car hoists. Hoist A will cost $20,000, will
require servicing of $500 every two years, and last ten years. Hoist B will cost $15,000, require
servicing of $800 per year, and last eight years. If the cost of capital is 7%, which is the better
option, given that the firm has an ongoing requirement for a hoist?
A) Hoist A, since it has a greater equivalent annual annuity.
B) Hoist A, since it has a greater present value (PV).
C) Hoist B, since it has a greater present value (PV).
D) Hoist B, since it has a greater equivalent annual annuity.

Answer 1

A) Hoist A, since it has a greater equivalent annual annuity

Explanation:

Using financial calculator to calculate the Npv of Hoist A

Inputs: C0= -20,000

C2= -500. Frequency= 1

C4= -500. Frequency= 1

C6= -500. Frequency= 1

C8= -500. Frequency= 1

C10= -500. Frequency= 1

I= 7%

Npv = compute

We get , NPV of the Hoist A as -$21,696.52

Now , calculating the EAA of the hoist A

Using financial calculator to calculate EAA

Inputs: N= 10

I/y= 7%

Pv= 21,696.52

Fv= 0

Pmt= compute

We get, EAA as -$3,089

Hoist B

Using financial calculator to calculate Npv

Inputs: C0= -15,000

C1= -800. Frequency= 8

I= 7%

Npv= compute

We get, Npv of the project As -$19,777.04

Now calculate EAA

Inputs: N= 8

I/y= 7%

Pv= 19,777.04

Fv= 0

Pmt = compute

We get, EAA as -$3,312

As the EAA of Hoist A is higher than hoist B we choose Hoist A .