A consulting engineering firm is considering two models of SUVs for the company principals. A GM model will have a first cost of $36,000, an operating cost of $4000, and a salvage value of $15,000 after 3 years. A Ford model will have a first cost of $32,000, an operating cost of $3100, and also have a $15,000 resale value, but after 4 years. (a) At an interest rate of 15% per year, which model should the consulting firm buy? Conduct an annual worth analysis. (b) What are the PW values for each vehicle?
What will be an ideal response?
(a) AWGM = -36,000(A/P,15%,3) – 4000 + 15,000(A/F,15%,3)
= -36,000(0.43798) – 4000 + 15,000(0.28798)
= $-15,448
AWFord = -32,000(A/P,15%,4) – 3100 + 15,000(A/F,15%,4)
= -32,000(0.35027) – 3100 + 15,000(0.20027)
= $-11,305
Purchase the Ford SUV
(b) PWGM = -15,448(P/A,15%,12)
= -15,448(5.4206)
= $-83,737
PWFord = -11,305(P/A,15%,12)
= -11,305(5.4206)
= $-61,280
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