Question

2. A small company has the option of buying its own delivery vehicle or contracting with a shipping service to deliver 500,000 parts per year over 4 years. The delivery service has quoted a price of $0.20/part for delivery during this period. Purchasing the delivery vehicle will require an up front investment of $65,000 at n-0, annual O&M costs of $15,000, and labor expenses for the driver of $45,000 per year Assuming a salvage value of $15,000 at n-4, determine the unit cost of owning/operating the delivery vehicle. Then, determine whether the company should buy their own vehicle or contract with the delivery service. Assume a MARR of 10%.

Answer 1

2.

R = 10%

n=4 years

If delivery vehicle is purchased:

Present value of the total cost of vehicle = down payment + PV of O&M cost + PV of labor cost - PV of salvage benefits

Present value of the total cost of vehicle = 65000 + 15000*(P/A, 10%, 4) + 45000*(P/A, 10%, 4) - 15000*(P/F, 10%, 4)

Present value of the total cost of vehicle = 65000 + (15000+45000)*3.170 - 15000*.6830

Present value of the total cost of vehicle = $244955

So,

Annual worth of the vehicle = 244955*(A/P, 10%, 4) = 244955*.3155 = $77283.3

So,

Unit cost = 77283.3/500000

Unit cost = $.15 per part

Since unit cost after buying the vehicle is less than unit cost in contracting. So, delivery vehicle should be purchased.