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

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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. 25. The incremental External Rate of Return (ΔERR) between the Epsilon and Zeta trucks (first decimal; no rounding) is

a) 10.4%; b) 10.6%; c) 10.8%; d) 11.3%.

  1. 26. From your calculations, the best truck based on the external rate of return (ERR) method is
       a) Delta; b) Epsilon; c) Zeta.
  1. 27. If the company’s truck budget is $850,000, which truck(s) should it purchase assuming that trucks are independent investments?
       a) Zeta only; b) Delta and Epsilon; c) Delta and Zeta; d) Epsilon and Zeta.
  1. 28. Donald plans to make $200 bank deposits at the end of every other month in 2019 (i.e., end of February, end of April, end of June … end of December).

What is the equivalent monthly (end of each month of12 months) deposit if the interest rate is 12% compounded monthly?

a) 200(A/F,12%/12,2)
b) 200/2
c) 200(A/P,12%/12,2)
d) 200(6)(A/F,12%,12)

Hint: Delta's NFW = $81,900

Epsilon's NPW = $89,000

Zeta's NFW = $709,100

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