Question

Name ricase perform an annual worth analysis to decide between purchasing a used Ferran and new Camry. The Ferrari costs $35.000. has a $2,600/yr. O&M cost, and can be sold for $25,000 at the end of 5 years (because it is still a Ferrari). The Camry costs $25,000, has a $1,500/yr. O&M cost, and can be sold for $6,500 at the end of 5 years. For simplicity, please calculate based on annual payments and 4% interest. Please state your choice along with its annual financial benefit rounded to the nearest cent. (30 pts) What is the internal rate of return on an investment that costs $80K initially, saves 515K/yr, and has a salvage value of $10K at the end of 8 years? Please state your answer o the nearest tenth of a percent unless you are confident stating it to a greater level of recision. Hint: you may start at any interest rate, but 10% is recommended. (30 pts)

Answer 1

(Question 1)

AW, Ferrari ($) = - 35,000 x A/P(4%, 5) - 2,600 + 25,000 x P/F(4%, 5) x A/P(4%, 5)

= - 35,000 x 0.2246** - 2,600 + 25,000 x 0.8219** x 0.2246**

= - 7,861 - 2,600 + 4,614.97

= - 5,846.03

AW, Camry ($) = - 25,000 x A/P(4%, 5) - 1,500 + 6,500 x P/F(4%, 5) x A/P(4%, 5)

= - 25,000 x 0.2246** - 1,500 + 6,500 x 0.8219** x 0.2246**

= - 5,615 - 1,500 + 1,199.89

= - 5,915.11

Since Ferrari has lower negative AW, this should be selected.

**From A/P and P/F Factor tables