MHB Equivalent Uniform Annual Cost

AI Thread Summary
FasterTrucks Ltd is evaluating two delivery vehicle models using the Equivalent Uniform Annual Cost (EUAC) method, factoring in a 10% cost of capital. The total initial cost for the chosen vehicle is R180,000, which includes a purchase price of R150,000 and R30,000 for adjustments. The vehicle's economic lifetime is estimated at three years, necessitating a replacement chain approach for calculations. The present value (PV) of the vehicle is calculated to be R315,236.66, leading to an annual payment (PMT) of R72,380.66 over six years, though the basis for the six-year term is unclear given the three-year lifespan mentioned. The discussion highlights the importance of accurately determining the payment period in EUAC calculations.
waptrick
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FasterTrucks Ltd is a transport company. The
enterprise needs to decide if a new delivery
vehicle will be purchased. Two models are
currently considered. You are required to
indicate which one of the two models should
be purchased. You decide to apply the method
of EQUIVALENT UNIFORM ANNUAL COST.
Since the economic lifetimes of the two models
differ, you will have to apply the replacement
chain approach. Assume that the company’s
cost of capital amounts to 10% per year.
The following information is provided to you:

The purchase price of the vehicle amounts to
R150 000 now. Furthermore, the vehicle needs
to be adjusted at a total cost of R30 000 now.
The purchase price and the cost of adjusting
the vehicle are not expected to change during
the next ten years. The vehicle’s expected
economic lifetime is estimated as three years.

The answer is = R 72 380.66

I know you have to get the present value of the vehicle and then calculate the annual payments but I am not sure how to get this answer?

This was the method used to get the answer:

PV= -180 000 - 180 000/(1.10)^3 = 315 236.66

Then,

PV= 315 236.66
N=6
i=10%

therefore PMT= 72 380.66
 
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waptrick said:
PV= 315 236.66
N=6
i=10%
therefore PMT= 72 380.66
Your PV calculation is correct.
Payment formula:
A = amount (72380.66)
n = number of payments (6)
i = interest factor (.10)
P = Ai / [1 - 1/(1 + i)^n] : that's work out to 72380.66

However, no idea where the "6 years" comes in.
Problem only mentions 3 years.
 
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