The EUAW of the alternatives and see if there is a cross over point in the decision.
Answer to Problem 70P
Therefore, the most economical choice is, Diesel.
Explanation of Solution
The cars average distance covered by car is
Calculation:
Calculate the annual cost of each fuel for each case.
Calculate the annual cost for diesel.
Substitute
Calculate the annual cost for Gasoline.
Substitute
Alternative1: Diesel
Given:
Vehicle cost is
Annual repairs
Annual insurance premium is
Salvage value is
Interest rate
Time period is
Here, vehicle cost is P, salvage value is S.
Calculate the factor
Substitute
Substitute
Here, EUAB is zero, thus,
Alternative 2: Gasoline
Given:
Vehicle cost is
Annual repairs
Annual insurance premium is
Salvage value is
Interest rate
Time period is
Here, vehicle cost is P, salvage value is S.
Calculate the factor
Substitute
Substitute
Here, EUAB is zero, thus,
Tabulate the EUAC of alternatives A and B.
Outflows | |||||
Year | Diesel | Gasoline | Interest rate |
EUAW A | EUAW B |
Figure (1)
Cross over point is a point on the chart when an indicator and security intersect and is used to predict any movements in the market. Thus, in this case the lines of both alternatives are parallel so there is no cross over point.
Conclusion:
Therefore, the most economical choice is, Diesel.
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Chapter 6 Solutions
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