Reference no: EM133291022

Question: The WWM Corporation is a trucking company that moves household goods long distance. It is thinking of replacing part of its current fleet of trucks. These are currently all Fords. The firm has narrowed the choice to two models. Both are capable of carrying the same amount of goods. The first one is made by Volvo. The model costs $148,437 initially. It is expected to have a life of 4 years and is depreciated straight-line to a book value of $18,080. At the end of 4 years, you will sell the truck for a $16,734 sale price and repeat the same process. The maintenance costs are expected to be $25,558 before tax each year.

The second model is one made by Mercedes. This costs $269,368 and lasts 8 years. It will be depreciated straight-line to a book value of $31,155. At the end of 8 years, you will sell the truck for a sale price of $40,158 and repeat the same process. The maintenance costs are expected to be $30,709 before tax each year.

The firm has a tax rate of 37%. It is anticipated that the firm will be profitable for the foreseeable future. The firm has a discount rate for this project of 14%. Assume all cash flows occur at the end of each year except where otherwise stated. What is the difference between the equivalent annual cost (EAC) of Volvo and Mercedes? Take the difference between the two EACs. i.e., the EAC of Volvo minus the EAC of Mercedes.