Acme Landfill Company is considering the purchase of 10 better trash collection

Question

Acme Landfill Company is considering the purchase of 10 better trash collection trucks. Each truck costs $50,000 and will last 7 years. the firm estimates that the entire purchase will increase its annual total annual revenues by $100,000 per year for as long as the trucks last.

a) If the real interest rate is 10%, should the firm buy the 10 trucks? You must support your answer by showing the details of your calculation and the formula that you use.



b) Would your answer to part a change if the interest rate fell to 8%? Show your calculation and briefly explain as necessary.





Thank you for your help

Explanation / Answer

Acme Landfill Company is considering the purchase of 10 better trash collection trucks. Each truck costs $50,000 and will last 7 years. the firm estimates that the entire purchase will increase its annual total annual revenues by $100,000 per year for as long as the trucks last.

a) If the real interest rate is 10%, should the firm buy the 10 trucks? You must support your answer by showing the details of your calculation and the formula that you use.

NPV of the project is: -50000*10+100000/(1+0.1)+100000/(1+0.1)2+100000/(1+0.1)3+100000/(1+0.1)4+100000/(1+0.1)5+100000/(1+0.1)6+100000/(1+0.1)7=-500000+90909.09+82644.63+75131.48+ +68301.34+62092.13+56447.39+51315.81=-13158.13

the firm should not buy the trucks as this investment would reduce the value of the firm


b) Would your answer to part a change if the interest rate fell to 8%? Show your calculation and briefly explain as necessary.

NPV of the project is: -50000*10+100000/(1+0.08)+100000/(1+0.08)2+100000/(1+0.08)3+100000/(1+0.08)4+100000/(1+0.08)5+100000/(1+0.08)6+100000/(1+0.08)7=-500000 +92592.59+85733.88+79383.22

+73502.99+68058.32+63016.96+58349.04= 20637

If the real interest rate would be 8% then the firm should go ahead with the investment project as it would increase the value of the firm

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