Determine which alternative is more economical

Reference no: EM133219773

Exercise: Suppose that a company whose main activity is the realization of tourist excursions in San Pedro de Atacama, acquired four years ago 10 fully equipped buses at a value of $ 35,000,000 each, which have been depreciated by the straight line method with useful life expressed in time (remaining useful life of six years). At this time the book value of the buses coincides with their fair market value, the total annual operational costs are $2,400,000 and a salvage value of $ 2,000,000 per bus. The existing alternative is to replace the current buses with 12 smaller buses, which are valued according to the market at 28,000,000 each.

The estimate is that the annual operating costs will decrease by 15%, that the new buses will last six years and that $ 4,000,000 each can be rescued once their useful life is exhausted. If the discount rate or TMAR of the company is 9% it is asked to determine which alternative is more economical.

Reference no: EM133219773

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