7. Bestline Furniture Store has a choice of overhauling its present delivery tru

Question

7. Bestline Furniture Store has a choice of overhauling its present delivery truck or purchasing a new one. The following information is available. Present New Truck Truck 12,000 15,500 Purchase cost, new Remaining book value Overhaul needed now Annual cash operating costs Salvage value now Salvage value, 5 years from now 3,250 2,000 7,500 4,000 3,000 1,0005,000 If the company keeps the old delivery truck, it will have to be overhauled immediately at the cost shown above. With the overhaul it can be made to last more. The new truck will also last for are evaluated on a basis of a 5 years 5 years. All investment projects 20% rate of return. Required: Using the INCREMENTAL APPROACH, calculate (show work) which alternative is favored and by how much?

Explanation / Answer

Incremental approach Year Overhaul of present truck Purchase of new truck Incremental Revenue / (cost) Discount Factor @ 20% Present Values 0 $2,000.00 $12,500.00 -$10,500.00 1 -$10,500.00 1 $7,500.00 $4,000.00 $3,500.00 0.83333333 $2,916.67 2 $7,500.00 $4,000.00 $3,500.00 0.69444444 $2,430.56 3 $7,500.00 $4,000.00 $3,500.00 0.5787037 $2,025.46 4 $7,500.00 $4,000.00 $3,500.00 0.48225309 $1,687.89 5 $6,500.00 -$1,000.00 $7,500.00 0.40187757 $3,014.08 Incremental NPV $1,574.65 Bestline furniture Store should purchase the new truck as this option has a incremental NPV which is a postive figure.

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