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8 February, 02:11

A suburban taxi company is considering buying taxis with diesel engines instead of gasoline engines. The cars average 80,000 km a year. Use an annual cash flow analysis to determine the more economical choice if interest is 6%. Diesel GasolineVehicle cost $24,000 $19,000Useful life, in years 5 4Fuel cost per lite 88 92Mileage, in km/liter 16 11Annual repairs $900 $700Annual insurance premium 1,000 1,000End-of-useful-life resale value 4,000 6,000

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  1. 8 February, 04:26
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    The diesel engine offers relatively lower uniform annual cost that is $11287.93, so diesel engine taxis should be chosen.

    Step-by-step explanation:

    R = 6%

    Useful life n = 5 years

    Annual distance covered = 80000 KM

    For a diesel car,

    Annual fuel cost = (80000/16) *.88 = $4400

    Present value of total cost = vehicle cost + present value of the fuel cost + present value of annual repair cost + present value of annual premium - present value of resale value

    Present value of total cost = 24000 + 4400 * (1-1/1.06^5) /.06 + 900 * (1-1/1.06^5) /.06 + 1000 * (1-1/1.06^5) /.06 - 4000/1.06^5

    Present value of total cost = $47548.86

    Let, uniform annual cost = EUAC1

    Then,

    EUAC1 = 47548.86 / ((1-1/1.06^5) /.06) = $11287.93

    For a gasoline car,

    Useful life = 4 years

    Annual fuel cost = (80000/11) *.92 = $6690.91

    Present value of total cost = vehicle cost + present value of the fuel cost + present value of annual repair cost + present value of annual premium - present value of resale value

    Present value of total cost = 19000 + 6690.91 * (1-1/1.06^4) /.06 + 700 * (1-1/1.06^4) /.06 + 1000 * (1-1/1.06^4) /.06 - 6000/1.06^4

    Present value of total cost = $43322.83

    Let, uniform annual cost = EUAC2

    Then, EUAC2 = 43322.83 / ((1-1/1.06^4) /.06)

    EUAC2 = $12502.6

    Since diesel engine offers relatively lower uniform annual cost that is $11287.93, so diesel engine taxis should be chosen.
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