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Cost Benefit Analysis

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A city has learned that by buying garbage trucks, labor costs for garbage removal would be reduced. You, the analyst, have also collected the following information:

Cost of the trucks today is $400,000
Annual savings in this year's constant dollars is $90,000
Trucks will last for four years, then will be sold for $100,000
The city can borrow money (discount rate) at 7 percent
Inflation (for the next four years) is expected to average 3 percent

All the dollar amounts are in this year's dollars (constant dollars)

Assuming the costs and benefits incur at the end of the year, should the city buy the trucks.

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This problem is related to capital budgeting Capital budgeting involves taking decision about long term mix of the composition of assets of the business. As per Zen Wealth, " Capital Budgeting is the process by which the firm decides which long-term investments to make. Capital Budgeting projects, i.e., potential long-term investments, ...

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