Problem

Thrift Transportation Company wants to bid for a new business involving transporting passengers in a new line between two cities. The company is studying the size of the bus needed for purchase for this new route. The company has three choices:

a. Purchase a 20-passenger bus with a price of $49,500 that has an operating cost of $40,000 per year, an estimated life of three years, and a salvage value of $10,000.

b. Purchase a 40-passenger bus with a price of $107,000 that has an operating cost of $75,000 per year, an estimated life of five years, and a salvage value equal to the cost of its removal.

c. Purchase a 50-passenger bus with a price of $151,000 that has an operating cost of $95,000 per year, an estimated life of six years, and a salvage value equal to the cost of its removal.

Assume that the bus in all the cases will operate with a full load and that the passenger seat annual income is $3,000 (i.e., each passenger capacity will bring an income of $3,000 per year). If the transportation company has MARR of 15%, which of the buses if any should the company buy? Use the ROR method.