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is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it
is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). The new truck would cost $55,774. The investment would require a working capital investment of $4,000 which is fully recoverable at the end of the useful life. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate annual cost savings of $7,900 per year. At the end of eight years, the company will be able sell the truck for an estimated $27,800. Traditionally, the company has used a general rule that it should not accept a proposal unless it has a payback period that is less than 50% of the asset's estimated useful life. The company has a 30% tax rate. The company's cost of capital is 8%. The company assumes that all cash flows are completed by year-end, except the initial investment and working capital costs. The existing truck would be scraped at no cost or benefit to the company. Required Part A: Calculate the following for the purchase of the new delivery truck. (a) Net present value (b) Internal rate of return (c) Discounted payback period using after-tax cash flows (d) Profitability index Part B: If the company's cost of capital increased to 10% what would be the net present value of this investment?
| is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). | ||
| The new truck would cost $55,774. The investment would require a working capital investment of $4,000 which is fully recoverable at the end of the useful life. | ||
| Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate annual cost savings of $7,900 per year. | ||
| At the end of eight years, the company will be able sell the truck for an estimated $27,800. | ||
| Traditionally, the company has used a general rule that it should not accept a proposal unless it has a payback period that is less than 50% of the asset's estimated useful life. | ||
| The company has a 30% tax rate. | ||
| The company's cost of capital is 8%. | ||
| The company assumes that all cash flows are completed by year-end, except the initial investment and working capital costs. | ||
| The existing truck would be scraped at no cost or benefit to the company. | ||
| Required | ||
| Part A: Calculate the following for the purchase of the new delivery truck. | ||
| (a) Net present value | ||
| (b) Internal rate of return | ||
| (c) Discounted payback period using after-tax cash flows | ||
| (d) Profitability index | ||
| Part B: If the company's cost of capital increased to 10% what would be the net present value of this investment? |
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Financial Reporting And Analysis
Authors: Lawrence Revsine, Daniel Collins
4th Edition
0073527092, 978-0073527093
