Question

You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $14,500 to purchase and which will have OCF of −$1,300 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $20,500 to purchase and which will have OCF of −$700 annually throughout that vehicle’s expected 4-year life. Both cars will be worthless at the end of their life. You intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future.

If the business has a cost of capital of 11 percent, calculate the EAC. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Answer 1

Scion xA:

Cost of Car = $14,500
Useful Life = 3 years
Annual OCF = -$1,300

NPV = -$14,500 - $1,300 * PVIFA(11%, 3)
NPV = -$14,500 - $1,300 * 2.44371
NPV = -$17,676.823

EAC = NPV / PVIFA(11%, 3)
EAC = -$17,676.823 / 2.44371
EAC = -$7,233.60

Toyota Prius:

Cost of Car = $20,500
Useful Life = 4 years
Annual OCF = -$700

NPV = -$20,500 - $700 * PVIFA(11%, 4)
NPV = -$20,500 - $700 * 3.10245
NPV = -$22,671.715

EAC = NPV / PVIFA(11%, 4)
EAC = -$22,671.715 / 3.10245
EAC = -$7,307.68