Question

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 $29,500. Annual maintenance costs for the Explorer are expected to be $750 per year more than that of the 4Runner. The purchase price for Toyota 4Runners is 35,750 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 12% per year, which vehicle should it buy? 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

Answer 1

	Ford explorer	Toyota 4runners	Toyota- Ford
Initial Cost	-29500	-35750	-6250
Annual O&M	x+750	x	750
Salvage value	14750	21450	6700
Useful life	3	3

PW=0= -6250 + 750(P/ A, I, n) + 6700(P/ F, I, n)

0= -6250 + 750(P/ A, I, 3) + 6700(P/ F, I, 3)

0=-6250 + 750 (1+i)^n -1 / ((i(1+i)^n) + 6700 (1/(1+i)^n)

From the hit and trial method,

I= 16 [Approx.]

Given, MARR is 12%

As the i> MARR, the Toyota Ford is better option.

b) Because the incremental ROR>MARR