Question

A waste disposal company is considering the replacement of one of its aging trucks. The key parameters of the three trucks under scrutiny are provided below.
Parameters	Delta	Epsilon	Zeta
1. Initial Cost ($)	250,000	375,000	450,000
2. Revenues ($)	230,000 at EOY1 increasing by 2.5% annually thereafter	195,000 at EOY1 increasing by 3,000 annually thereafter	235,000 at EOY1 decreasing by 1% annually thereafter
3. Operating costs ($)	140,000 at EOY1 decreasing by 2,000 annually thereafter	125,000 at EOY1 decreasing by 2% annually thereafter	EOY1-EOY4 = 125,000; EOY5-EOY8 = 135,000 EOY9-EOY12 = 170,000 EOY13-EOY16 = 190,000
4. End-of-life salvage value ($)	-20,000	7,000	-20,000
5. Useful life (years)	4	8	16
EOY = End-of-year Industry Standard = 4 years MARR = 10%

5. Zeta’s AEW (rounded to the nearest $100) over 30 years (it was repeated several times) is

a) $19,200; b) $19,700; c) $20,100; d) $21,800.

6. The best truck based on the NFW method is
   a) Delta; b) Epsilon; c) Zeta.

7. The best truck based on the AEW method is
   a) Delta; b) Epsilon; c) Zeta.

8. Based on the simple payback method, Delta’s recovery period (to the nearest half or full year) is

a) 2.5; b) 3.0; c) 3.5; d) 4.0.

Hint: Delta's NFW = $81,900

  Epsilon's NPW = $89,000

  Zeta's NFW = $709,100

Answer 1

Delta:

	Revenue	Cost	Salvage Value	Cash Flow
Year 0		$250,000		-$250,000
Year 1	$230,000	$140,000		$90,000
Year 2	$235,750	$138,000		$92,750
Year 3	$241,643.75	$136,000		$105,643.75
Year 4	$247,684.84	$134,000	-$20,000	$93,684.84

IRR = 19.11%

Epsilon:

	Revenue	Cost	Salvage Value	Cash Flow
Year 0		$375,000		-$375,000
Year 1	$195,000	$125,000		$70,000
Year 2	$198,000	$122,500		$75,500
Year 3	$201,000	$120,050		$80,950
Year 4	$204,000	$117,649		$86,351
Year 5	$207,000	$115,296		$91,704
Year 6	$210,000	$112,990		$97,010
Year 7	$213,000	$110,730		$102,270
Year 8	$216,000	$108,516	$7,000	$114,484

IRR = 15.66%

Zeta:

	Revenue	Cost	Salvage Value	Cash Flow
Year 0		$450,000		-$450,000
Year 1	$235,000	$125,000		$110,000
Year 2	$232,650	$125,000		$107,650
Year 3	$230,324	$125,000		$105,324
Year 4	$228,020	$125,000		$103,020
Year 5	$225,740	$135,000		$90,740
Year 6	$223,483	$135,000		$88,483
Year 7	$221,248	$135,000		$86,248
Year 8	$219,035	$135,000		$84,035
Year 9	$216,845	$170,000		$46,845
Year 10	$214,677	$170,000		$44,677
Year 11	$212,530	$170,000		$42,530
Year 12	$210,404	$170,000		$40,404
Year 13	$208,300	$190,000		$18,300
Year 14	$206,217	$190,000		$16,217
Year 15	$204,155	$190,000		$14,155
Year 16	$202,114	$190,000	-$20,000	-$7,886

IRR = 17.71%

21. We can compute the IRR with a financial calculator

Based on IRR, Delta has the highest IRR. So, it would be the best option. Answer: (a)