A consulting engineering firm’s CFO wants to purchase either Ford Explorers or Toyota 4Runners for company principals. The two models under consideration cost $30,900 for the Ford and $36,400 for the Toyota. When considering life-cycle costs, the AOC of the Explorer is expected to be $600 per year more than that of the 4Runner. 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 18% per year, which vehicle should it buy?
What will be an ideal response?
(a) Find rate of return on incremental cash flow
0 = -5500 + 600(P/A,?i*,3) + 6390(P/F,?i*,3)
?i* = 15.5% (spreadsheet)
(b) Incremental ROR is less than MARR; select Ford Explorer
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