A city has learned that by buying larger garbage trucks, it could reduce labor costs for garbage removal. Note: All the dollar amounts below are in this year’s dollars (constant dollars).
a. Cost of the trucks today is $400,000.
b. Annual savings in this year’s constant dollars is $90,000.
c. Trucks will last for 4 years and then will be sold for $100,000.
d. The city can borrow money at a 7% discount rate to purchase the trucks.
e. Inflation (for the next 4 years) is expected to average 3%.
f. Assuming the costs and benefits are incurred at the end of the year, should the city buy the trucks?
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