Boyne Painting Contractors needs to purchase a new truck. The owner is considering two different truck models that are currently on the market. Boyne’s two alternatives are presented below:
Truck A: Boyne can purchase Truck A for $ 45,000. The truck has a useful life of 12 years and will require annual maintenance costs of $ 1,500 each year. Boyne expects to sell the truck for $ 7,000 after 12 years.
Truck B: Boyne can purchase Truck B for $ 40,000. This truck also has a useful life of 12 years but will have no scrap value. It will require maintenance costs every four years as follows:
Year 4: $ 3,000
Year 8: $ 6,000
Year 12: $ 8,000
Which truck should Boyne purchase given an interest rate of 6%, compounded annually? Assume that maintenance costs will be paid at year- end.