Question

A waste disposal company is considering the replacement of one of its aging trucks. The key parameters of the three trucks under scrutiny are provided below.
Parameters	Delta	Epsilon	Zeta
1. Initial Cost ($)	250,000	375,000	450,000
2. Revenues ($)	230,000 at EOY1 increasing by 2.5% annually thereafter	195,000 at EOY1 increasing by 3,000 annually thereafter	235,000 at EOY1 decreasing by 1% annually thereafter
3. Operating costs ($)	140,000 at EOY1 decreasing by 2,000 annually thereafter	125,000 at EOY1 decreasing by 2% annually thereafter	EOY1-EOY4 = 125,000; EOY5-EOY8 = 135,000 EOY9-EOY12 = 170,000 EOY13-EOY16 = 190,000
4. End-of-life salvage value ($)	-20,000	7,000	-20,000
5. Useful life (years)	4	8	16
EOY = End-of-year Industry Standard = 4 years MARR = 10%

13. The best truck based on the simple payback method is
    a) Delta; b) Epsilon; c) Zeta.

14. Delta’s benefit/cost (B/C) ratio (second decimal; no rounding) is
    a) 0.98; b) 1.03; c) 1.08; d) 1.10.

15. Zeta’s benefit/cost (B/C) ratio (second decimal; no rounding) is
    a) 0.99; b) 1.02; c) 1.06; d) 1.09.

16. The incremental B/C ratio (second decimal; no rounding) between the Delta and Epsilon trucks is

a) 0.90; b) 0.99; c) 1.03; d) 1.08.

Hint: Delta's NFW = $81,900

Epsilon's NPW = $89,000

Zeta's NFW = $709,100

Answer 1

Total Cost of Delta Trucks = Initial Cost + Operating Cost + Salvage Value (since salvage is negative )

                                               = 250,000 + (140,000 +138,000 + 136,000 + 134,000) + 20,000

                                               = 818,000

& Total Revenue from Delta Trucks= Revenue

                                                              = 230,000 +235750 + 241643.75 + 247684.84

                                                              = 955,078.59

                                              

Total Cost of Epsilon Trucks = Initial Cost + Operating Cost

                                               = 375,000 + (125,000 +122,500 + 120050 + 117649 + 115296 +112990                                +110730 +108515)

                                               = 1195230

& Total Revenue from Epsilon Trucks= Revenue + Salvage Value

                                                              = 195,000 +198000 + 201000 + 204000 +207000 +210000 + 213000 + 217000 + 220000 + 7000

                                                              = 1165,000

Total Cost of Zeta Trucks = Initial Cost + Operating Cost + Salvage Value (since salvage is negative )

                                               = 450,000 + (125,000 x4 + 135000x4 + 170000x4 + 190000x4) + 20000

                                               = 450000 + 500000 + 540000 + 680000 + 760000 + 20000

                                                = 2,950,000

& Total Revenue from Epsilon Trucks= Revenue + Salvage Value

                                                              = 235,000 +232500 + 230700 + 227000+ 224021+222147+220069+219451+217985+215784+213545+245615

                                                              = 3,650,000

Therefore as per the calculations above, The best truck is is (b) Epsilon

Delta's benefit cost is (b) 1.03%

Delta's benefit cost is (a) 0.99

Incremental ratio is (d) 1.08