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Social ScienceApply 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.
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. |
Expert Answer
a) Present value of each warranty cost for 5 years is calculated and added to the price of the engine.
Detroit engines:
Image Transcriptionclose
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
Marcus engines:
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
Answer: The cost of installation and present value of warranties for Detroit engines is $24341.95, less than the ...
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