You are starting a family pizza parlor and need to buy a motorcycle for delivery orders....
You are starting a family pizza parlor and need to buy a motorcycle for delivery orders. You have two models in mind. Model A costs $8,700 and is expected to run for 6 years; Model B is more expensive, with a price of $14,900, and has an expected life of 10 years. The annual maintenance costs are $810 for Model A and $750 for Model B. Assume that the opportunity cost of capital is 10 percent. Calculate equivalent annual costs (EAC) of each models. (Do not round the discount factor. Round intermediate calculations and final answers to 2 decimal places, e.g. 15.25.)
EAC of Model A is $
EAC of Model B is $
Which one should you buy?
Homework Answers
| Model A | |||||||||||
| Discount rate | 0.1 | ||||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | ||||
| Cash flow stream | -8700 | -810 | -810 | -810 | -810 | -810 | -810 | ||||
| Discounting factor | 1 | 1.1 | 1.21 | 1.331 | 1.4641 | 1.61051 | 1.771561 | ||||
| Discounted cash flows project | -8700 | -736.364 | -669.421 | -608.565 | -553.2409 | -502.946 | -457.224 | ||||
| NPV = Sum of discounted cash flows | |||||||||||
| NPV Model A = | -12227.76 | ||||||||||
| Where | |||||||||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||||||||
| Discounted Cashflow= | Cash flow stream/discounting factor | ||||||||||
| Equvalent annuity(EAA)= | -2807.58 | ||||||||||
| Required rate = | 0.1 | ||||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | ||||
| Cash flow stream | 0 | -2807.58 | -2807.58 | -2807.58 | -2807.584 | -2807.58 | -2807.58 | ||||
| Discounting factor | 1 | 1.1 | 1.21 | 1.331 | 1.4641 | 1.61051 | 1.771561 | ||||
| Discounted cash flows project | 0 | -2552.35 | -2320.32 | -2109.38 | -1917.618 | -1743.29 | -1584.81 | ||||
| Sum of discounted future cashflows = | -12227.76 | ||||||||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||||||||
| Discounted Cashflow= | Cash flow stream/discounting factor | ||||||||||
| Model B | |||||||||||
| Discount rate | 0.1 | ||||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| Cash flow stream | -14900 | -750 | -750 | -750 | -750 | -750 | -750 | -750 | -750 | -750 | -750 |
| Discounting factor | 1 | 1.1 | 1.21 | 1.331 | 1.4641 | 1.61051 | 1.771561 | 1.948717 | 2.143589 | 2.357948 | 2.593742 |
| Discounted cash flows project | -14900 | -681.818 | -619.835 | -563.486 | -512.2601 | -465.691 | -423.355 | -384.869 | -349.881 | -318.073 | -289.157 |
| NPV = Sum of discounted cash flows | |||||||||||
| NPV Model B = | -19508.43 | ||||||||||
| Where | |||||||||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||||||||
| Discounted Cashflow= | Cash flow stream/discounting factor | ||||||||||
| Equvalent annuity(EAA)= | -3174.91 | ||||||||||
| Required rate = | 0.1 | ||||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| Cash flow stream | 0 | -3174.91 | -3174.91 | -3174.91 | -3174.907 | -3174.91 | -3174.91 | -3174.91 | -3174.91 | -3174.91 | -3174.91 |
| Discounting factor | 1 | 1.1 | 1.21 | 1.331 | 1.4641 | 1.61051 | 1.771561 | 1.948717 | 2.143589 | 2.357948 | 2.593742 |
| Discounted cash flows project | 0 | -2886.28 | -2623.89 | -2385.35 | -2168.504 | -1971.37 | -1792.15 | -1629.23 | -1481.12 | -1346.47 | -1224.06 |
| Sum of discounted future cashflows = | -19508.43 | ||||||||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||||||||
| Discounted Cashflow= | Cash flow stream/discounting factor | ||||||||||
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