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Need help with NPV calculation

Problem:

The City of San Jose must replace a number of its concrete mixer trucks with new trucks. It has received several bids and has evaluated closely the performance characteristics of the various trucks.
• The Patterbilt truck, which costs $74,000, is top-of-the-line equipment. The truck has a life of 8 years, assuming that the engine is rebuilt in the fifth year. Maintenance costs of $2,000 a year are expected in the first 4 years, followed by total maintenance and rebuilding costs of $13,000 in the fifth year. During the last 3 years, maintenance costs are expected to be $4,000 a year. At the end of 8 years the truck will have an estimated scrap value of $9,000.
• A bid from Bulldog Trucks, Inc., is for $59,000 a truck. Maintenance costs for this truck will be higher. In the first year they are expected to be $3,000, and this amount is expected to increase by $1,500 a year through the eighth year. In year 4 the engine will need to be rebuilt, and this will cost the company $15,000 in addition to the maintenance costs in that year. At the end of 8 years the Bulldog truck will have an estimated scrap value of $5,000.

Please show work
1. If the City of San Jose’s opportunity cost of funds is 8 percent, which bid should it accept? Ignore tax considerations, as the city pays no taxes.
2. If its opportunity costs were 15 percent, would your answer change?
Reply 1
Avatar for TBD
TBD
7
I think the key is in the following statement in you post:


Please show work


Make an effort to at least attempt the question and someone may help.

TBD
Reply 2
Avatar for Econla
Econla
1
For both questions.

NPV = - Initial Investment - (cost year xn)/(1+cost of funds)^xn - ........... + (scrap value year xn)/(1+cost of funds)^xn

where xn is the number of the year when the cash movement happens.

Choose the one with highest NPV.

P.S (THIS IS NOT THE FORUM FOR THIS TYPE OF QUESTIONS)
Reply 3
Avatar for naimenim
naimenim
OP
Thanks to Econla. I was guessing that. I was in a rush. The question sounds so dry. I apologize...after all, I'm new here.

I thought I can have some questions sometimes in this forum. Is there any section in this forum like that?
Reply 4
Avatar for sj27
sj27
14
Original post by naimenim
Thanks to Econla. I was guessing that. I was in a rush. The question sounds so dry. I apologize...after all, I'm new here.

I thought I can have some questions sometimes in this forum. Is there any section in this forum like that?


What econla gave you should have been in whatever textbook you are using....?

I'm sure there is somewhere on TSR for these types of questions, but this forum isn't it. Also, there is nowhere on TSR that you can just post an assignment question and expect someone else to do the work for you :s-smilie:

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