The garden supply company is also considering taking out a loan and buying a small truck to save costs on deliveries. The truck costs $60,000 and is expected to earn end of year after tax net cash inflows of $10000, $15000, $20000 and $20000 for the next four years before it wears out sufficiently to be unreliable and must be sold for an estimated $10000 (after tax). Required Calculate the NPV of the truck if the interest rate on the loan is 5% pa. Calculate the NPV of the truck if the interest rate on the loan is 10% pa. Advise management of your recommendation regarding purchase of the truck based on your NPV calculations. Calculate the accounting rate of return on the truck investment. e. What additional advice would you give management if the required payback period was three years?

Net present value commonly known as NPV refers to the amount left after subtracting the present…

Answered: Calculate the NPV of the truck if the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

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The garden supply company is also considering taking out a loan and buying a small truck to save costs on deliveries. The truck costs $60,000 and is expected to earn end of year after tax net cash inflows of $10000, $15000, $20000 and $20000 for the next four years before it wears out sufficiently to be unreliable and must be sold for an estimated $10000 (after tax).

Required

Calculate the NPV of the truck if the interest rate on the loan is 5% pa.
Calculate the NPV of the truck if the interest rate on the loan is 10% pa.
Advise management of your recommendation regarding purchase of the truck based on your NPV calculations.
Calculate the accounting rate of return on the truck investment.

e. What additional advice would you give management if the required payback period was three years?

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