g out a loan and buying a small truck to save costs on deliveries. The truck costs $60000 and is expected to earn end of year after tax net cash inflows of $11000, $17000, $20000 and $20000 for the next four years before it wears out sufficiently to be unreliable and must be sold for an estimated $18000 (aft
g out a loan and buying a small truck to save costs on deliveries. The truck costs $60000 and is expected to earn end of year after tax net cash inflows of $11000, $17000, $20000 and $20000 for the next four years before it wears out sufficiently to be unreliable and must be sold for an estimated $18000 (aft
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 $60000 and is expected to earn end of year after tax net
- a) Calculate the NPV of the truck if the interest rate on the loan is 4.0% pa.
- b) Calculate the NPV of the truck if the interest rate on the loan is 10.7% pa.
- c) Advise management of your recommendation regarding purchase of the truck based on your NPV calculations.
- d) 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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