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 rovided below Delta Epsilon 375,000 195,000 at EOY1 Zeta Parameters 1. Initial Cost 250,000 450,000 230,000 at EOY1 2. Revenues increasing by 3.000 annually 2.5% annually thereafter 140,000 at EOY1 235,000 at EOY1 decreasing by 1% annually thereafter increasing by thereafter 125,000 at EOY1 EOY1-EOY4 125,000; decreasing by EOY5-EOY8 135,000 | EOY9-EOY12 170,000 3. Operating costs decreasing by | 2% annually 2,000 annually thereafter thereafter EOY13-EOY16 = 190,000 4. End-of-life salvage value ($) 5. Useful life -20,000 7,000 -20,000 4 16 ears EOY End-of-year Industry Standard - 4 years MARR-10% e 1.Delta's Net Future Worth (NFW) (rounded to the nearest $100) of 2. Epsilon's Net Present Worth (NPW) (rounded to the nearest $100) is 3. Zeta's Net Future Worth (NFW) (rounded to the nearest $100) after 16 a) $78,800; b) $81,900; c) $82,900; d) $84,300 a) $89,000; b) $93,700; c) $94,100; d) $95,200 years is a) $678,900; b) $698,600; c) $709,100; d) $743,300. 4.Delta's Annual Equivalent Worth (AEW) (rounded to the nearest $100) is a) $17,700; b) $18,500; c) $18,900; d) $19,200

Economics practice questions (please show your work and the answer could always be a 'none of the above' answer in addition to the options given)

Answer 1

(1) (b)

For Delta,

• Revenue, year N = Revenue, year (N - 1) x 1.025
• Cost, year N = Cost, year (N - 1) - $2,000
• Revenue in year 4 is lower by additional $20,000 (since salvage value = -$20,000).

NFW is computed as follows.

DELTA
Year	Revenue	Cost	Net Benefit	FV Factor@10%	Compounded Net Benefit
	(A)	(B)	(C)=(A)-(B)	(D)	(C)x(D)
0		2,50,000	-2,50,000	1.4641	-3,66,025
1	2,30,000	1,40,000	90,000	1.3310	1,19,790
2	2,35,750	1,38,000	97,750	1.2100	1,18,278
3	2,41,644	1,36,000	1,05,644	1.1000	1,16,208
4	2,27,685	1,34,000	93,685	1.0000	93,685
				NFW ($) =	81,935

(2) (a)

For Epsilon,

• Revenue, year N = Revenue, year (N - 1) + $3,000
• Cost, year N = Cost, year (N - 1) x 0.98
• Revenue in year 8 is higher by additional $7,000 (since salvage value = $7,000).

NPW is computed as follows.

EPSILON
Year	Revenue	Cost	Net Benefit	PV Factor@10%	Discounted Net Benefit
	(A)	(B)	(C)=(A)-(B)	(D)	(C)x(D)
0		3,75,000	-3,75,000	1.0000	-3,75,000
1	1,95,000	1,25,000	70,000	0.9091	63,636
2	1,98,000	1,22,500	75,500	0.8264	62,397
3	2,01,000	1,20,050	80,950	0.7513	60,819
4	2,04,000	1,17,649	86,351	0.6830	58,979
5	2,07,000	1,15,296	91,704	0.6209	56,941
6	2,10,000	1,12,990	97,010	0.5645	54,760
7	2,13,000	1,10,730	1,02,270	0.5132	52,481
8	2,23,000	1,08,516	1,14,484	0.4665	53,408
				NPW ($) =	88,420

(3) (c)

For Zeta,

• Revenue, year N = Revenue, year (N - 1) x 0.99
• Revenue in year 16 is lower by additional $20,000 (since salvage value = -$20,000).

NFW is computed as follows.

ZETA
Year	Revenue	Cost	Net Benefit	FV Factor@10%	Compounded Net Benefit
	(A)	(B)	(C)=(A)-(B)	(D)	(C)x(D)
0		4,50,000	-4,50,000	4.5950	-20,67,738
1	2,35,000	1,25,000	1,10,000	4.1772	4,59,497
2	2,32,650	1,25,000	1,07,650	3.7975	4,08,801
3	2,30,324	1,25,000	1,05,324	3.4523	3,63,605
4	2,28,020	1,25,000	1,03,020	3.1384	3,23,322
5	2,25,740	1,35,000	90,740	2.8531	2,58,892
6	2,23,483	1,35,000	88,483	2.5937	2,29,501
7	2,21,248	1,35,000	86,248	2.3579	2,03,368
8	2,19,035	1,35,000	84,035	2.1436	1,80,137
9	2,16,845	1,70,000	46,845	1.9487	91,288
10	2,14,677	1,70,000	44,677	1.7716	79,147
11	2,12,530	1,70,000	42,530	1.6105	68,495
12	2,10,404	1,70,000	40,404	1.4641	59,156
13	2,08,300	1,90,000	18,300	1.3310	24,358
14	2,06,217	1,90,000	16,217	1.2100	19,623
15	2,04,155	1,90,000	14,155	1.1000	15,571
16	1,82,114	1,90,000	-7,886	1.0000	-7,886
				NFW ($) =	7,09,137

(4) (a)

Delta's AEW = Delta's NFW / FVIFA(10%, 4) = $81,935 / 4.6410** = $17,655

**From FVIA Factor table