Question
Arkansas Best Freightways is considering a purchase of three different potential trucks. it is considering three different investment scenarios and their respective cash flows. Arkansas
Arkansas Best Freightways is considering a purchase of three different potential trucks. it is considering three different investment scenarios and their respective cash flows. Arkansas Best Freightways use a cost of capital of 9 percent to evaluate the investments.
Year | Investment 1 | Investment 2 | Investment 3 | Cost of Capital | ||
Year 0 (today) | Buy new truck | (85,000) | (105,000) | (125,000) | 9 | % |
Year 1 | Increased profits | 25,000 | 20,000 | 40,000 | ||
Year 2 | Increased profits | 25,000 | 30,000 | 30,000 | ||
Year 3 | Increased profits | 25,000 | 40,000 | 20,000 | ||
Year 4 | Increased profits | 25,000 | 50,000 | 10,000 | ||
Required:
1. Calculate the net cash flows (not discounted) over the life of the three investments (years 0 to 4). (Negative amounts should be entered using a minus sign.)
2. Calculate the present value for each of the three possible investments over years 1 through 4, using the 9 percent cost of capital as the interest (or discount) rate. (Round your answer to 2 decimal places. Use the Excel NPV() function to calculate the present value for each of the three possible investments.)
3. Given the present value of each investment over years 1-4, and the initial cost to invest in a truck, which truck provides the greatest net present value overall?
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