You Are Trying to Pick the Least Expensive Car for Your

question 25

Multiple Choice

You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $15,000 to purchase and which will have OCF of −$1,600 annually throughout the vehicle's expected life of four years as a delivery vehicle; and the Toyota Prius, which will cost $27,000 to purchase and which will have OCF of −$750 annually throughout that vehicle's expected six-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 10 percent, what is the EAC of the most expensive car?

• A) −$6,949.40
• B) −$6,332.06
• C) −$7,008.27
• D) −$7,371.81

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Definitions:

Operating Inefficiently

Conducting business in a manner that does not maximize output or profits relative to input and resources.

Technological Advance

The development and application of innovative tools, machines, systems, and methods to improve processes, productivity, and efficiency.

Production Possibilities Curve

A graphical representation showing the maximum combination of goods or services that can be produced with a fixed amount of resources.

Opportunity Cost

The price paid for not selecting the immediate alternative choice while deciding.