Rhea F Industries is considering an investment in a fleet of 10 delivery vans to take its products to customers. The vans will cost $14,000 each to buy, payable immediately. The annual running costs which include the drivers salary are expected to total $48,000 for each van. The vans are expected to operate successfully for six years, at the end of this period they will all have to be sold. The disposal proceeds for each van are expected to be about $2,000 for each van. At present, Rhea F Industries outsources all its deliveries to a commercial carrier, XYZ Couriers. XYZ Couriers is expected to charge a total of $510,000 each year for the next six years to undertake the deliveries. If the vans are purchased, they will save the business $30,000 per year before depreciation. Kidwai, the CEO wants an evaluation of this potential investment. Shen, the Finance Manager indicates the opportunity cost of finance for investments is 15% while Yuan, the Management Accountant indicates that the minimum Payback Period for investments should be 3 years.

The projected inflows and outflows are:

Time $000ImmediatelyCost of vans($140)1 years timeSavings before depreciation$302 years timeSavings before deprecation$303 years timeSavings before depreciation$304 years timeSavings before depreciation$305 years timeSavings before depreciation$306 years timeSavings before depreciation$306 years timeDisposal proceeds$20

Show all your workings clearly for this section of the paper and round relevant calculations to two decimal places.

Required:

1. What is the Accounting Rate of Return (ARR) of buying the vans?
2. What is the payback period for Rhea F Industries if they were to invest in the purchase of the 10 delivery vans?
3. Determine the NPV of the delivery vans investment project for Rhea F Industries using the 15 percent opportunity cost of finance. (Use the Present Value table provided).
4. What is the internal rate of return (IRR) of the delivery vans investment project for Rhea F Industries? (Use the Present Value table provided. Hint: Trial and Error. You already know the NPV of this project at 15%. Try either 10% or 12%.)
5. Using your answers from (a), (b), (c) and (d) and any other relevant information, explain whether or not Rhea F Industries should proceed with the delivery vans investment project. What is the maximum amount the company would be prepared to pay for the 10 delivery vans, given the potential benefits of owning it?

Present value of 1 , that is, (1+r)1t where: r= discount rate n= number of periods until payment. Discount rate (r) Present value table continued Period (n)16%17%18%19%20%21%22%23%24%25%26%27%28%29%30% 0.8620.8560.8470.8400.8330.8260.8200.8130.8060.8000.7940.7870.7810.7750.769 20.7430.7310.7180.7060.6940.6830.6720.6610.6500.6400.6300.6200.6100.6010.592 30.6410.6240.6090.5930.5790.5640.5510.5370.5240.5120.5000.4880.4770.4660.455 40.5520.5340.5160.4990.4820.4670.4510.4370.4230.4100.3970.3840.3730.3610.350 50.4760.4560.4370.4190.4020.3860.3700.3550.3410.3280.3150.3030.2910.2800.289 70.3540.3330.3140.2960.2790.2630.2490.2350.2220.2100.1980.1880.1780.1680.159 100.2270.2080.1910.1760.1620.1800.1670.1550.1440.1340.1250.1160.1080.1010.094 120.1680.1520.1370.1240.1120.1020.0920.0830.0760.0690.0620.0570.0520.0470.043 150.1080.0950.0840.0740.0650.0570.0510.0450.0400.0350.0310.0280.0250.0220.020 170.0800.0690.0600.0520.0450.0390.0340.0300.0260.0230.0200.0170.0150.0130.012 180.0690.0590.0510.0440.0380.0320.0280.0240.0210.0180.0160.0140.0120.0100.009 200.0510.0430.0370.0310.0260.0220.0190.0160.0140.0120.0120.0110.0090.0060.007