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Plymouth and Brockton Bus Lines? (P&B) is a regional bus transportation company that operates in…

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Plymouth and Brockton Bus Lines? (P&B) is a regional bus transportation company that operates in Eastern? Massachusetts, New? Hampshire, Maine, and Rhode Island.

The company is in the process of choosing between two bus models for its new dedicated hourly service between Boston Logan International Airport and? Manchester-Boston Regional Airport. One? model, the? OR-5000, is more expensive to purchase and maintain but will have a longer operational life than the other? model, the? SNS-2000. ? P&B’s discount rate is

11.3?%.

The company plans to continue with one of the two models for the foreseeable future.

Based on the purchase and operational costs of each model sbown? below, which model should it? choose?

?(Note: dollar amounts are in? thousands)

Model

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

?OR-5000

-$202

-$4.2

-$4.2

-$4.2

-$4.2

-$4.2

-$4.2

-$4.2

?SNS-2000

-$100

-$1.9

-$1.9

-$1.9

-$1.9

Part? A) Based on the costs of each? model, which should it? choose? ?(Select the best choice? below.)

A.

?P&B should choose the? SNS-2000 because the equivalent annual annuity of its costs is smaller.

B.

?P&B should choose the? SNS-2000 because the NPV of its costs is smaller.

C.

?P&B should choose the? OR-5000 because it lasts longer.

D.

?P&B should choose? OR-5000 because the equivalent annual annuity of its costs is smaller.

Part? B) Just as the company is about to make its? decision, a new bus manufacturer submits a bid for its? model, the? EX-3000, to be considered for this purchase. This new model will have a? 10-year operational life. Its annual maintenance costs are only anticipated to be? $1,500 per year. The purchase price of the? EX-3000 is? $250,000 per unit.

What is the equivalent annual annuity of the cost of the? EX-3000?

C) Does the addition of the option of purchasing the? EX-3000 change your decision from Part? A?

A.

?Yes, the? EX-3000 is now the most attractive option.

B.

?No, the addition of the? EX-3000 to our choice of bus models does not change my decision.

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