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Maxilift Australia has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with
Maxilift Australia has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information.
Present Truck ($) | New Truck ($) | |
Purchase cost new | $21,000 | $ 30,000 |
Remaining book value | $11,500 | |
Overhaul needed now | $7,000 | |
Annual cash operating costs | $10,000 | $6,500 |
Salvage value now | $9,000 | |
Salvage value eight years from now | 1,000 | 4,000 |
Additional Information
If the company keeps and overhauls the truck, then the truck will be usable for eight more years. | |
If a new truck is purchased, it will be used for eight years, after which it will be traded. | |
The new truck would be diesel-operated, resulting in a substantial reduction in annual operating costs, as shown above. | |
The company computes depreciation on a straight-line basis. All investment projects are evaluated using 16% discount rate. |
Required: | ||
(a) | Determine the present value of the net cash flows associated with the purchase of the new truck option. | (4 marks) |
(b) | Determine the present value of the net cash flows associated with the keep the old truck option. | (4 marks) |
(c) | Which option would you recommend that the company accept? Why? | (2 marks |
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