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Show equations E While preparing its budget for next year, the Sweetwater Candy Company is planning for a capital expenditure on a delivery truck in
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E While preparing its budget for next year, the Sweetwater Candy Company is planning for a capital expenditure on a delivery truck in March of next year. To determine how much that expenditure will be, you must evaluate the following two options. 2 3 Option #1: Keep old delivery truck and overhaul it. If the company keeps and overhauls its old truck, it will be used for five more years and then discarded (no salvage value). 5 Option #2: Buy new delivery truck and sell old truck. If a new delivery truck is purchased now, it will be used for 10 years, after which it will be traded in at its salvage value for another new truck. The new truck would be diesel and cost less to operate resulting in an increase in expected annual cash flows, as shown below. The old truck would be sold now at its salvage value. Management requires investments to have a payback period of 5 years, and it requires a 16% return on its investments. The company has assembled the following information: 9 10 11 Old Truck N/A New Truck $50,000 Conditional Formatting Purchase cost now Cost of overhaul needed now $18,000 N/A Annual expected cash flows generated $5,500 $3,000 $8,500 N/A Salvage value now Salvage value in ten years N/A $6,000 16 17 18 Required: 19 (A.) Calculate the Payback Period, Net Present Value, and Internal Rate of Return for the two options. 20 (B.) Which investment should the company choose? Explain. 21Step by Step Solution
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