Problem 1 (Equivalent Annual Cost EAC. Total points: 27) Company X is choosing a policy on the age at which to replace trucks in its fleet, which depends upon which truck line it chooses. There are two (mutually exclusive) alternatives:

A) a 10 year truck that has initial (time 0) price/cost $25,000, annual maintenance cost of $1000/year and salvage value in year/time 10 of $6000, or

B) a 15 year truck that has initial (time 0) price/cost of $28,000, annual maintenance cost of $1500/year, and salvage value in year/time 15 of $3000.

All cash flows are after tax. Discount rate = 10%.

I recommend you first write down your calculator entries for "step 1" (calculating the NPV of costs) and "step 2" (calculating the EAC) for each of the two trucks; THEN you can go through and answer the questions based on what you have written down.

We begin with the three questions to calculate the NPV of costs for the 10 year truck (STEP 1):

Part I a. (STEP 1, 10 year truck.) To calculate the NPV of net costs for the 10 year truck, please indicate your calculator entries for N and I/Y, where N is a simple integer (e.g., 20 for 20 periods), and I/Y is recorded as xx.x (to one decimal, recorded as percentage points per the calculator).

Problem 1. Part I b. (STEP I, 10 year truck.) To calculate the NPV of net costs for the 10 year truck, please indicate your calculator entries for PMT and FV. Note: You need to include ALL cash flows in the Step 1 calculation. However, the initial (time 0) truck cost will be counted in part Ic, NOT here.

(Please indicate EXACTLY how you enter the corresponding value in the calculator, e.g., 1,000 for positive 1,000 dollars (no $ signs, with comma as needed, no decimal point, round to nearest dollar), -1,000 for negative one thousand dollars. Be sure to enter a negative (-) for a cash outflow (cost) and a positive (without a + or -) for money you receive (cash inflow).)

Problem 1. Part I c. (STEP 1, 10 year truck.) What is the NPV (of net costs) for the 10-year truck strategy? (Hint: Here, the new truck cost SHOULD be counted in this NPV as a time 0 cost.) This is your "bottom line" answer for Step 1 and is rounded to the nearest dollar.

Problem 1. Part I d. (STEP 2, 10 year truck.) In the next 3 questions (part I d-f), please indicate your entries/calculations for the Equivalent Annual Cost of the 10-year truck. We start (part 1 d) with your calculator entries for N and I/Y, where N is a simple integer (e.g., 20 for 20 periods), and I/Y is recorded as xx.x (to one decimal, recorded as percentage points per the calculator).

Problem 1. Part I e. (STEP 2, 10 year truck.) To calculate the EAC for the 10 year truck, what are your calculator entries for FV and PV?

(Please indicate how you enter the corresponding value in the calculator, e.g., 1,000 for positive 1,000 dollars (no $ signs, with comma as needed, no decimal point, ROUND TO NEAREST DOLLAR), -1,000 for negative one thousand dollars. You can enter a negative (-) for a cash outflow (cost or value of cost) and a positive (without a + or -) for money you receive (cash inflow). )

Problem 1. Part I f. (STEP 2, 10 year truck.) What is the Equivalent Annual Cost for the 10-year truck?

Problem 1. Part II a. (STEP 1, 15 YEAR TRUCK.) To calculate the NPV of net costs for the 15 year truck, please indicate your calculator entries for N and I/Y, where N is a simple integer (e.g., 20 for 20 periods), and I/Y is recorded as xx.x (to one decimal, recorded as percentage points per the calculator).

Note: A 15 year truck that has initial price/cost of $28,000, annual maintenance cost of $1500/year, and salvage value after 15 years of $3000. The discount rate is 10% as before.