Conduct an annual worth analysis

A consulting engineering firm is considering two models of SUVs for the company principals. A GM model will have a first cost of $26,000, an operating cost of $2000, and a salvage value of $12,000 after 3 years. A Ford model will have a first cost of $29,000, an operating cost of $1200, and a $15,000 resale value after 3 years.

At an interest rate of 15% per year, which model should the consulting firm buy?

Conduct an annual worth analysis.

Assume that an alternative has a 3-year life and that you calculated its annual worth over its 3-year life cycle. If you were told to provide the annual worth of that alternative for a 4-year study period, would the annual worth value you calculated from the alternative’s 3-year life cycle be a valid estimate of the annual worth over the 4-year study period? Why or why not?

Solution:

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