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A company is considering replacing its fleet of delivery vans and has a choice between gasoline and diesel powered vehicles. The gasoline powered truck has an initial cost of $34000 and a fuel economy of 9 MPG. The diesel powered model has an initial cost of $37500 and a fuel economoy of 12.8 MPG. Gasoline sells for 3.29/gallon and diesel for 3.69/gallon. Fuels costs are expected to increase at a rate of 7% per year for the life of the vehicles. the company uses a 16% marr to determine investment choices and plans to use the vehicles for 5 yrs. assume both vehicles have a $4000 salvage value after 5 yrs.

a)What is the break even mileage for two alternatives. On a sketch, show the cost comparison as a function of miles per year.

b)If the company uses the vehicles 87000 miles per year, what is the incremental IRR?

Econometrics, Economics

  • Category:- Econometrics
  • Reference No.:- M9473876

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