Question

Economics

Question #2: You decided to buy a car with an initial price of $10,000. After 4 years, its price will be 70% of the initial price. The operation cos the car is $700 per year. The interest rate is 3%. a- What is the salvage value of the car? ( 3 points) b- Calculate the Annual equivalent cost (AEC). (3 points) Question #3: The table below shows the investment amount and the revenues of your project in years 0,1 and 2. If you hope to make at least 12% rate of return, what should be the minimum revenue in year 3? (4 points) Cash flow 0-54.00 1 52.300 252.800 3 SX

Answer 1

Question 2

(a)

Initial price of car = $10,000

Life of car = 4 years

The salvage value refers to the value of an asset at the end of its life.

So, the value of the car at the end of years is its salvage value.

The value of car at the end of 4 years is 70% of its initial price.

Calculate the salvage value -

Salvage value = 70% of the initial price of car

Salvage value = 0.70 * $10,000 = $7,000

Thus,

The salvage value of the car is $7,000.

(b)

Calculate the annual equivalent cost (AEC) -

AEC = Initial price (A/P, i, n)+ Annual operating cost - Salvage value A/F, i, n)

AEC = $10,000(A/P, 3%, 4)+$700- $7,000(A/F, 3%, 4)

AEC = [$10,000 * 0.2690] + $700- [$7,000 * 0.2390]

AEC = $2,690 + $700 - $1,673 = $1,717

Thus,

The annual equivalent cost is $1,717.