Answer: Overhauling is a better option as it is cheaper by $1,273
Explanation:
Total cost of the new truck:
= Cost to purchase + Present value of operating costs - Present value of residual value
= 14,000 + (200 * present value of annuity factor, 4%, 6 years) - 2,000 / (1 + 4%)⁶
= 14,000 + (200 * 5.2421) - 1,581
= $13,467
Total cost of Overhauling truck:
= 8,000 + (800 * present value of annuity factor, 4%, 6 years)
= 8,000 + (800 * 5.2421)
= $12,194
Overhauling is a better option as it is cheaper by:
= 13,467 - 12,194
= $1,273
The better option will be overhauling the truck as it is cheaper by $1,273.
Based on the information given, the total cost of the new truck will be:
= Cost to purchase + Present value of operating costs - Present value of residual value
= 14,000 + (200 × PV of annuity factor, 4%, 6) - 2,000 / (1 + 4%)⁶
= 14,000 + (200 * 5.2421) - 1,581
= $13,467
The total cost of overhauling the truck will be:
= 8,000 + (800 × present value of annuity factor, 4%, 6)
= 8,000 + (800 × 5.2421)
= $12,194
Therefore, the difference between the two options will be:
= $13,467 - $12,194
= $1,273
Therefore, the better option will be overhauling the truck as it is cheaper by $1,273.
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