The City of San Jose must replace a number of its concrete mixer trucks with new
ID: 2665961 • Letter: T
Question
The City of San Jose must replace a number of its concrete mixer trucks with new trucks. It has received several bids and has evaluated closely the performance characteristics of the various trucks.• The Patterbilt truck, which costs $74,000, is top-of-the-line equipment. The truck has a life of 8 years, assuming that the engine is rebuilt in the fifth year. Maintenance costs of $2,000 a year are expected in the first 4 years, followed by total maintenance and rebuilding costs of $13,000 in the fifth year. During the last 3 years, maintenance costs are expected to be $4,000 a year. At the end of 8 years the truck will have an estimated scrap value of $9,000.
• A bid from Bulldog Trucks, Inc., is for $59,000 a truck. Maintenance costs for this truck will be higher. In the first year they are expected to be $3,000, and this amount is expected to increase by $1,500 a year through the eighth year. In year 4 the engine will need to be rebuilt, and this will cost the company $15,000 in addition to the maintenance costs in that year. At the end of 8 years the Bulldog truck will have an estimated scrap value of $5,000.
• The last bidder, Best Tractor and Trailer Company, has agreed to sell trucks at $44,000 each. Maintenance costs in the first 4 years are expected to be $4,000 the first year and to increase by $1,000 a year. For the city’s purposes, the truck has a life of only 4 years. At that time it can be traded in for a new Best Truck, which is expected to cost $52,000. The likely trade-in value of the old truck is $15,000. During years 5 through 8 the second truck is expected to have maintenance costs of $5,000 in year 5, and these are expected to increase by $1,000 each year. At the end of 8 years the second truck is expected to have a resale or salvage value of $18,000.
Please show work
1. If the City of San Jose’s opportunity cost of funds is 8 percent, which bid should it accept? Ignore tax considerations, as the city pays no taxes.
2. If its opportunity costs were 15 percent, would your answer change?
Explanation / Answer
Patterbilt truck Bulldog Truck Best tractor Cost 74000 59000 44000 Year 1 2000 3000 4000 Year 2 2000 4500 5000 Year 3 2000 6000 6000 Year 4 2000 7500 7000 Year 5 2000 9000 5000 Year 6 4000 10500 6000 Year 7 4000 12000 7000 Year 8 4000 13500 8000 Rebuilt Cost 11000 15000 52000 Total Cost 107000 140000 144000 Less: Scrap Value 9000 5000 33000 Net Funds has to spend 98000 135000 111000 a. Opportunity Cost of Funds 8% 7840 10800 8880 b. Opportunity Cost of Funds 15% 14700 20250 16650 Patterbilt truck Bulldog Truck Best tractor Cost 74000 59000 44000 Year 1 2000 3000 4000 Year 2 2000 4500 5000 Year 3 2000 6000 6000 Year 4 2000 7500 7000 Year 5 2000 9000 5000 Year 6 4000 10500 6000 Year 7 4000 12000 7000 Year 8 4000 13500 8000 Rebuilt Cost 11000 15000 52000 Total Cost 107000 140000 144000 Less: Scrap Value 9000 5000 33000 Net Funds has to spend 98000 135000 111000 a. Opportunity Cost of Funds 8% 7840 10800 8880 b. Opportunity Cost of Funds 15% 14700 20250 16650Opportunity cost 8%: Patterbilt truck is loosing $7,840, it is lower than other trucks opportunity costs, so company has to accept Patterbilt trucks. Opportunity cost 15%: Patterbilt truck is loosing $14,700, it is lower than other trucks opportunity costs, so company has to accept Patterbilt trucks. Thank you... Thank you... Patterbilt truck Bulldog Truck Best tractor Cost 74000 59000 44000 Year 1 2000 3000 4000 Year 2 2000 4500 5000 Year 3 2000 6000 6000 Year 4 2000 7500 7000 Year 5 2000 9000 5000 Year 6 4000 10500 6000 Year 7 4000 12000 7000 Year 8 4000 13500 8000 Rebuilt Cost 11000 15000 52000 Total Cost 107000 140000 144000 Less: Scrap Value 9000 5000 33000 Net Funds has to spend 98000 135000 111000 a. Opportunity Cost of Funds 8% 7840 10800 8880 b. Opportunity Cost of Funds 15% 14700 20250 16650