Question

Asked Dec 1, 2019

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Apply WACC to the cost of the warranties. Find the present value of each warranty years. Then add that cost to the cost of the engine. Choose the lowest cost. Show your calculations and choice. Also find the PV of the bus warranty in the same way.

WACC = 4.896%

Warranty years = 5

Engine |
Detroit engines |
Marcus engines |

Price per engine, including installation |
$20,000 |
$18,000 |

Average annual warranty cost per year |
$1,000 |
$1,500 |

The chosen engine will be installed in every bus and will become a cost figure for each bus. |

Average warranty cost per year per bus for the first five years is $1,100. The present value of this cost will be used as a cost figure for each bus. Afterwards, the bus operator will become responsible the repairs on the buses. |

Step 1

a) Present value of each warranty cost for 5 years is calculated and added to the price of the engine.

Detroit engines:

Step 2

Marcus engines:

Step 3

Answer: The cost of installation and present value of warranties for Detroit engines is $24341.95, less than the ...

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