Reference no: EM132931066

Question - You are deciding on what type of truck to buy for your oilfield service company. You have a fleet agreement with Ford, and you are deciding between two alternatives. The first is a half-ton pickup that runs on regular unleaded gasoline, and will cost you $30,000. It is expected to have a service life of five years, and will be depreciated using a 7-year straight-line schedule. At the end of its service life, it will have a market value of $6,000. The alternative is a diesel powered half-ton that costs $40,000 with a service life of 7 years, and it will also be depreciated using a 7-year straight-line schedule. It will have a market value of $5,000 at the end of its service.

Either vehicle will be driven 30,000 miles each year, with the gasoline powered truck getting 15 miles per gallon, and the diesel getting 20 mpg. Despite diesel costing more from retail outlets, you will be able to use red-dye (colored diesel that does not incur state and federal taxes as it is used as an industrial input, rather than being sold to gas stations) diesel at the same rate you expect to pay for unleaded gasoline, $2.00 per gallon. Finally, because diesel engines are cheaper to maintain, you will only incur $1,500 in annual maintenance on the diesel truck as opposed to $2,000 annual maintenance on the gasoline powered truck. You have a 20% effective tax rate, and you will finance these trucks at 9% interest.

Required - What is the effective cost of each truck?