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 = 5EngineDetroit enginesMarcus enginesPrice per engine, including installation$20,000$18,000Average annual warranty cost per year  $1,000  $1,500The 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.

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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.

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Expert Answer

Step 1

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

Detroit engines:

Detroit Engines
154
155 Particulars
156 Price per engine plus installation
157 Average warranty cost
Values
Formula
20,000.00
1,000.00
4.896%
158 wacc
159 Number of years of warranty
160
161 PV of warranties of 5 years
4,341.951729471420 -PV(B158,B159,-B157)
24,341.95172947140B161+B 156
162 Total cost
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Detroit Engines 154 155 Particulars 156 Price per engine plus installation 157 Average warranty cost Values Formula 20,000.00 1,000.00 4.896% 158 wacc 159 Number of years of warranty 160 161 PV of warranties of 5 years 4,341.951729471420 -PV(B158,B159,-B157) 24,341.95172947140B161+B 156 162 Total cost

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Step 2

Marcus engines:

A
В
Marcus Engines
165
Values
Formula
166 Particulars
167 Price per engine plus installation
18,000.00
168 Average warranty cost
1,500.00
4.896%
169 wacc
170 Number of years of warranty
5
171
172 PV of warranties of 5 years
6,512.927594207130 PV(B169,B170,-B168)
24,512.92759420710 B172+B167
173 Total cost
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Image Transcriptionclose

A В Marcus Engines 165 Values Formula 166 Particulars 167 Price per engine plus installation 18,000.00 168 Average warranty cost 1,500.00 4.896% 169 wacc 170 Number of years of warranty 5 171 172 PV of warranties of 5 years 6,512.927594207130 PV(B169,B170,-B168) 24,512.92759420710 B172+B167 173 Total cost

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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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