17.2. A city has learned that by buying larger garbage trucks, it could reduce labor costs for garbage removal.

Cost of the trucks today is $400,000.

Annual savings in this years constant dollars is $90,000.

Trucks will last for 4 years and then will be sold for $100,000.

The city can borrow money at a 7% discount rate to purchase the trucks.

Inflation (for the next 4 years) is expected to average 3%.

Note: All the dollar amounts are in this years dollars (constant dollars).

Assuming the costs and benefits are incurred at the end of the year, should the city buy the truck?

Answer:
Calculation:
		Real Dollars	Nominal Doll.	Present value
Description	Time	Costs/Benefits	Costs/Benefit
Purchase	0	-400,000	-400,000	-400,000
Benefits	1	90,000	92,700
Benefits	2	90,000	95,481
Benefits	3	90,000
Benefits	4	90,000
Residual	4	100,000
Total Net PV
Select one (with "x"):
	The city should not buy the trucks because the net present value of the decision is positive.
	The city should buy the trucks because the net present value of the decision is positive.