Question
Upscale Home Fashions of Burlington pays fees to a delivery service that amount to an after-tax cost of 2 percent of revenue. Sales have averaged
Upscale Home Fashions of Burlington pays fees to a delivery service that amount to an after-tax cost of 2 percent of revenue. Sales have averaged $1.5 million, but have been as low as $1 million and as high as $2 million in the past decade. Upscale could buy its own delivery truck for $30,000, after tax, eliminating the need for the delivery service. The truck would last eight years, with a negligible salvage value. Salary for a driver and other operating costs would result in an after-tax cash outlay of $20,000 a year. The company has a 10 percent cost of capital. Prepare a graphical sensitivity analysis, showing the relationship between net present value for truck investment and sales for the store. Would you recommend acquisition of the truck? Key Data: Delivery fee 2% of sales, required investment $30,000, horizon of 8 years, fixed costs $20,000 per year, cost of capital of 10%.
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