Bob Tate is the director of strategy for a small truck delivery company. The company operates...

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Finance

Bob Tate is the director of strategy for a small truck deliverycompany. The company operates a fleet of 100 trucks. Of these, 36trucks will need to be replaced this year. Bob has two choices,either diesel or green trucks. The following are the facts for eachpossibility:
For EACH diesel truck: Cost = $175K; life, 3 years (the truckslose value quickly after 3 years of operations as the mileagereaches 200K); salvage value at end of three years, $50K; annualoperating costs, $90K.
For EACH green truck: Cost = $220K; life, 4 years; salvage valueat end of four years, $100K; annual operating costs, $75K.
Which choice should Bob make, diesel or green if the cost ofcapital is 10%; you may assume that the time period covered by thisdecision is 12 years IF you wish, and you can ignore the other 64of the 100 trucks in the fleet? (Ignore taxes, depreciation, andignore diversification.)

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4.3 Ratings (800 Votes)

Calculation of PV of cost of diesel truck Year Initial cost Operating Cost Salvage value Total Cost PV factor 10 PV of total cost 0 175 175 1 175 1 90 90 0909090909 See Answer

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