A city has learned that by buying larger garbage trucks, it could reduce labor costs for garbage removal.
Cost of the trucks today is $400,000.
Annual savings in this year's constant dollars is $90,000.
Trucks will last for 4 years and then will be sold for $100,000.
The city can borrow money at a 7% discount rate to purchase the trucks.
Inflation (for the next 4 years) is expected to average 3%.
Note: All the dollar amounts are in this year's dollars (constant dollars).
Answer X:
Calculation:
		Real Dollars	Nominal Doll.	Present value
Description	Time	Costs/Benefits	Costs/Benefit
Purchase	0	-400,000	-400,000	-400,000
Benefits	1	90,000	92,700	X
Benefits	2	90,000	95,481	X
Benefits	3	90,000	98,345	X
Benefits	4	90,000	101,296	X
Residual	4	100,000	X	X
Total Net PV				X

Answer rating: 100% (QA)

To analyze this investment in larger garbage trucks based on the given parameters we use the Net Present Value NPV approach The given information sugg... View the full answer