Question

The town of Millbridge has to make a decision on replacing its garbage truck. It has...

The town of Millbridge has to make a decision on replacing its garbage truck. It has narrowed the choice down to two different models. Model A will initially cost $80,000 and then will cost $4,100 per year to operate for its 20-year life. Model B will initially cost $100,000 and then will cost $3,600 per year to operate for its 30-year life. Use the annualized cost approach to determine which is a better choice. Assume a discount rate of 6 percent per year. Please show formulas used in excel sheet.

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Answer #1
Model A
Annual operating cost -4100
Multiply: Annuity PVF at 6% for 20yrs 11.46992
Present value of operating cost -47026.7
Initial investment -80000
Total outflows -127027
Divide: Annuity PVF at 6% for 20 yrs 11.46992
Annualised cost -11074.8
ModelB
Annual operating cost -3600
Multiply: Annuity PVF at 6% for 30yrs 13.76483
Present value of operating cost -49553.4
Initial investment -100000
Total outflows -149553
Divide: Annuity PVF at 6% for 20 yrs 13.76483
Annualised cost -10864.9
Model B shall be accepted
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