Capital budgeting and sensitivity analysis Ritchie's Trucking hauls logs from wood lots to pulp mills and saw mills. Ritchie now operates a single truck and is considering buying a second truck. The total required investment in the truck and trailer would be $130,000. The equipment would have a five-year life and a salvage value of $20,000. Ritchie's cost of capital is 12% and Ritchie faces a marginal tax rate of 35%. You can assume that for tax purposes Ritchie will de¬ preciate the net cost (that is, purchase price less salvage value) of the new equip¬ ment on a straight-line basis.

Adding a second truck would provide two major advantages for Ritchie. First, the new equipment would allow Ritchie to accept business that he now turns down because of a lack of capacity. Ritchie expects that the net cash flow associated with this additional business is about $25,000 per year. Second, the new equipment would allow Ritchie to reduce the cost of current operations pri¬ marily by discontinuing the practice of having to pay drivers overtime. This sav¬ ings would amount to approximately $10,000.

REQUIRED

(a) Using the net present value criterion, is the investment in the new equip¬ ment justified?

(b) What is the minimum amount of annual benefit from the investment in the new equipment that will make the project acceptable?

(LO 1)