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Calculate the total present value of the running costs

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Reference no: EM133161522

Question - Freddie runs a medium sized business "Freddie's Delivery Service" (FDS), delivering parcels. He is considering purchasing a new fleet of vehicles as part of his business expansion. Freddie has negotiated a purchase price of $515,000 for this fleet. Using data from his existing vehicles, he estimates the following running costs for the new fleet of cars he is considering purchasing:

Insurance for the new fleet will cost $8,000 per year, payable at the start of each year

Based on mileage estimates, petrol will cost $960 per week, payable at the end of each week

Hiring extra employees to drive the new vehicles will cost $11,000 per fortnight, payable at the end of each fortnight

For the purposes of this question, assume that these are the only expenses involved in the purchase and operation of these vehicles. Freddie believes that this new fleet can be used for 8 years before the vehicles are no longer reliable. When this happens, he believes he can resell the vehicles for one fifth of the initial purchase price. Freddie also has a business account that lets him borrow or invest at 3.103% per annum effective.

Required -

(a) Calculate the present value of the eventual sales price. Give your answer in dollars, to the nearest cent.

(b) Calculate the total present value of the running costs (i.e. the insurance, petrol, and employee wages described above). Give your answer in dollars, to the nearest cent.

(c) What is the total cost of buying and running this fleet, in today's dollars? Give your answer in dollars, to the nearest cent.

Reference no: EM133161522

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