Problem $11\mathrm{.}22$

Projects with Different Lives

You are starting a family pizza parlor and need to buy a motorcycle for delivery orders. You have two models in mind. Model A costs $\backslash (\backslash$$ $9,000\backslash )$ and is expected to run for six years; model $\backslash ($ B $\backslash )$ is more expensive, with a price of $\backslash (\backslash$$ $14,000\backslash )$ and has an expected life of $10$ years. The annual maintenance costs are $\backslash (\backslash$$ $800\backslash )$ for model A and $\backslash (\backslash$$ $700\backslash )$ for model B$.$ Assume that the opportunity cost of capital is $10$ percent.

Which one should you buy?

Which one should you buy?

Hint: Calculate the net present value $($NPV$)$ of each motorcycle and then compute the equivalent annual cost $($EAC$).$ Note that since we are dealing with all negative cash flows $($costs$),$ we are looking for the alternative with the least negative EAC.