Costs of trucks today- $400,000, annual savings in constant dollars $90,000; trucks last for four years then are sold for $100k. The city can borrow at a (discount) rate of 7% to purchase the trucks. Inflation is expected to be at 3% average for the next four years.
Two other lenders provide alternative scenarios. Alternate lender 1 suggests that the inflation rate will be 4% and offers an interest rate of 7.5% while lender 2 suggests that the inflation rate will be 1% and offers a rate of 6.5%. For all three, the interest rates are guaranteed if made within the next thirty days. Which of the following decisions should be made and why?
a) The usual lender should be utilized because she offers a positive NPV.
b) Alternate lender one should be utilized because she offers the highest NPV.
c) The garbage trucks should not be purchased because there is the possibility of a negative NPV.
d) Alternate lender two should be utilized because most scenarios have a positive NPV and she offers the highest NPV under each scenario. e.) Each solution is as good as any other.