I/marr = 10%

n =6

1. (6 pts) A business has a choice between two different pickup trucks. Type A costs $35,000 and will last for 6 years. However, it is relatively cheaply built and will cost $3,500 every year to operate and maintain (O&M). The O&M is expected to increase by $100 every year. In addition, it will have to have a major transmission overhaul at the end of year 3, which is estimated to cost $4,000 then. The other option, Type B is more expensive to buy, $40,000, but has reduced O&M of $2,000 every year. It is expected to last 6 years also. Salvage value of Type A is $7,000 and Type B $6,000 at the end of 6 years. Which is the better option by AW analysis using an interest rate of % and by how much? $10,000 $7.000 Type A $0 -53.500 -53.600 -53,900 -54,000 $10,000 -$3.800 -$3,700 -$4.000 -$20,000 -$30,000 -$35.000 $ 40,000 CapEx 10&M Overhaul Salvage Value $10,000 $6,000 Type B $0 8 -$10,000 -$2,000 $2,000 $2,000 $2,000 $2,000 $2,000 -$20,000 -$30,000 -$40,000 -$40,000 CapEx O&M Salvage Value 1. (6 pts) A business has a choice between two different pickup trucks. Type A costs $35,000 and will last for 6 years. However, it is relatively cheaply built and will cost $3,500 every year to operate and maintain (O&M). The O&M is expected to increase by $100 every year. In addition, it will have to have a major transmission overhaul at the end of year 3, which is estimated to cost $4,000 then. The other option, Type B is more expensive to buy, $40,000, but has reduced O&M of $2,000 every year. It is expected to last 6 years also. Salvage value of Type A is $7,000 and Type B $6,000 at the end of 6 years. Which is the better option by AW analysis using an interest rate of % and by how much? $10,000 $7.000 Type A $0 -53.500 -53.600 -53,900 -54,000 $10,000 -$3.800 -$3,700 -$4.000 -$20,000 -$30,000 -$35.000 $ 40,000 CapEx 10&M Overhaul Salvage Value $10,000 $6,000 Type B $0 8 -$10,000 -$2,000 $2,000 $2,000 $2,000 $2,000 $2,000 -$20,000 -$30,000 -$40,000 -$40,000 CapEx O&M Salvage Value