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.
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, ...
Solution assists in Cost Benefit Analysis