Question

"The military is considering purchasing a new transport helicopter. It is believed the helicopter will be needed for 12 years. Helicopter 1 has an immediate purchase cost of $119,000; the annual maintenance is $5,000; and it can be salvaged for $16,000 at the end of its service life of 2 years. Helicopter 2 has an immediate acquisition cost of $180,000; the annual maintenance is $3,000; and it can be salvaged for $21,000 at the end of its service life of 6 years. Assume both helicopters can be purchased and operated repeatedly at the same costs. What is the annual equivalent cost of the helicopter that the military should purchase if the interest rate is 11.3%?"

Answer 1

	Helicopter 1	Helicopter 2
AEC of purchase cost:
-119000*0.113*1.113^2/(1.113^2-1) =	$ -69,765.03
-180000*0.113*1.113^6/(1.113^6-1) =		$   -42,916.14
Annual maintenance cost	$   -5,000.00	$      -3,000.00
Annual Equivalent Worth of salvage value:
16000*0.113/(1.113^2-1) =	$     7,572.17
21000*0.113/(1.113^6-1) =		$       2,633.88
Annual equivalent cost	$ -67,192.86	$   -43,282.25
The military should purchase Helicopter 2 as its AEC is lower.