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Question: a waste disposal company is considering the replacement of one...

Question details

A waste disposal company is considering the replacement of one of its aging trucks. The key parameters of the three trucks under scrutiny are provided below.

Parameters

Delta

Epsilon

Zeta

1. Initial Cost

($)

250,000

375,000

450,000

2. Revenues

($)

230,000 at EOY1

increasing by 2.5% annually thereafter

195,000 at EOY1

increasing by 3,000 annually thereafter

235,000 at EOY1

decreasing by 1% annually thereafter

3. Operating

costs ($)

140,000 at EOY1

decreasing by 2,000 annually thereafter

125,000 at EOY1

decreasing by 2% annually thereafter

EOY1-EOY4 = 125,000;

EOY5-EOY8 = 135,000

EOY9-EOY12 = 170,000

EOY13-EOY16 = 190,000

4. End-of-life salvage value ($)

-20,000

7,000

-20,000

5. Useful life

(years)

4

8

16

  • EOY = End-of-year
  • Industry Standard = 4 years
  • MARR = 10%
  1. 17. The incremental B/C ratio (second decimal; no rounding) between the Epsilon and Zeta trucks is

a) 0.98; b) 1.05; c) 1.07; d) 1.11.

  1. 18. Delta’s Internal Rate of Return (IRR) (first decimal; no rounding) is
       a) 18.1%; b) 19.8%; c) 20.8%; d) 21.1%.
  2. 19. Epsilon’s Internal Rate of Return (IRR) (first decimal; no rounding) is
       a) 16.0%; b) 16.8%; c) 17.0%; d) 17.3%.
  3. 20. The incremental Internal Rate of Return (ΔIRR) between the Delta and Zeta trucks (first decimal; no rounding) is
    a) 13.6%; b) 14.5%; c) 15.1%; d) 15.9%.

Hint: Delta's NFW = $81,900

Epsilon's NPW = $89,000

Zeta's NFW = $709,100

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