Question

Help Save & Exit Submit Check my work The CFO of a consulting engineering firm is deciding between purchasing Ford Explorers and Toyota 4Runners for company principals. The purchase price for the Ford Explorer will be $30,750. Annual maintenance costs for the Explorer are expected to be $700 per year more than that of the 4Runner. The purchase price for Toyota 4Runners is 38,000 The trade-in values after 3 years are estimated to be 50% of the first cost for the Explorer and 60% for the 4Runner, (a) What is the incremental ROR between the two vehicles? (b) Provided the firm's MARR is 21% per year, which vehicle should it buy? 20 points a) The incremental ROR between the two vehicles is b) The firm should buy (Click to select as the incremental ROR IS (Click to select the MARR. References

Answer 1

(ANSWER:

In order to find the incremental ror we will equate the pw to zero and we will subtract ford explorer from toyota 4 runners.

Toyota 4 runners salvage value = 60% * purchase price = 60% * 38,000 =22,800

Ford explorer = 50% * purchase price = 50% * 30,750 = 15,375

pw(toyota 4 runners - ford explorer) = Purchase price(toyota 4 runners - ford explorer) + amc(toyota 4 runners - ford explorer) (p/a,i,n) + salvage value(toyota 4 runners- ford explorer)(p/f,i,n)

0 = (-38,000 + 30,750) + 700(p/a,i,3) + (22,800 - 15,375)(p/f,i,3)

0 = - 7,250 + 700(p/a,i,3) + 7,425(p/f,i,3)

7,250 = 700(p/a,i,3) + 7,425(p/f,i,3)

Solving via trial and error we get that i is between 10% and 11% and solving further we get that i is 10.38%

So the incremental ror is 10.38%

so the company should buy ford explorer as the irr is lesser then marr. (10.38% < 21%)