Walt Wallace Construction Enterprises is investigating the purchase of a new dum
ID: 1248672 • Letter: W
Question
Walt Wallace Construction Enterprises is investigating the purchase of a new dumb truck. Interest is 9%. The cash flows for two likely models are as followed:Model A
First Cost: 50,000
Annual Operating: 2000
Annual Income: 9,000
Salvage Value: 10,000
Life (years): 10
Model B
First Cost: 80,000
Annual Operating: 1000
Annual Income: 12,000
Salvage Value: 30,000
Life (years): 10
a) using present worth analysis, which truck should the firm buy and why?
b) Before the construction company cam can close the deal, the dealer sells out of model b and cannot get any more. What should the firm do now and why?
Explanation / Answer
A) Using the present value function in Microsoft Excel or the formula found here: http://en.wikipedia.org/wiki/Present_value, one can calculate the present value of each bulldozer. Present value of A is $82,676.87 Present value of B is $96,101.32 However, we have to subtract off the cost of each bulldozer. So: The net present value of A is $32,676.87 The net present value of B is $16,101.32 So, we choose bulldozer A. B) It doesn't matter if model B is unavailable. You shouldn't buy that one anyway. Buy bulldozer A.
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