Question
You are a staff accountant for Totally Chemical, a small organization specializing in swimming pool chemicals. In a meeting last week, the vice president of
You are a staff accountant for Totally Chemical, a small organization specializing in swimming pool chemicals. In a meeting last week, the vice president of operations indicated that the organization is looking to expand into the trucking business so that Totally Chemical can increase its client base. The vice president has asked you to perform a capital budgeting analysis on the project and then email your findings.
- Calculate the net present value (NPV) method of capital budgeting.
- Calculate the internal rate of return (IRR) method of capital budgeting.
- Calculate the payback period (PP) method of capital budgeting.
Totally Chemical is considering an investment decision project in which the organization expands into the trucking business. Totally Chemical wants to begin this investment decision project by buying one truck. In four years, the truck can be sold for $25,000, with $2,000 of the working capital being returned. The discount rate is 8%.
Trucking Venture Specifics
Initial investment Cost of the truck $95,000 Working capital deposit $5,000 Operations (per year for 4 years) Trucking revenue $250,000 Less: Driver's salary $95,000 Insurance $20,000 Fuel and maintenance $50,000 Total expenses $165,000 Net annual cash flows $85,000 Disinvestment Sale of truck $25,000 Recovery of working capital $2,000 Total disinvestment $27,000
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