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 $18,000 to purchase and which will have OCF of −$2,000 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $27,000 to purchase and which will have OCF of −$1,050 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 13 percent, calculate the EAC. of both Scoin and Toyota Prius (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Which one should you choose? Scion xA Toyota Prius

Answer 1

		Scion xA	Toyota Prius
a	Purchase Cost ($)	(18,000)	(27,000)
b	Life of machines (years)	3	4
c	Running cost per year ($)	(2,000)	(1,050)
d	PVAF (based on life and 13% discount factor)	2.361	2.974
e	Present Value of Running cost of machine (c*d)	(4,722)	(3,123)
f	Cash outflow of machines (a+e)	(22,722)	(30,123)
g	Equivalent Annual Cost (f/d)	(9,624)	(10,129)

Decision: Since EAC is lower for Scion xA, it should be choosen.

*PVAF = (1-(1+r)-n)/r