please, please help me with this question. Thank you so much The Speedy - Delive
ID: 2529482 • Letter: P
Question
please, please help me with this question. Thank you so much
The Speedy - Delivery Company has two options for its delivery truck. The first option is to purchase a new truck for $14,000. The new truck will have a useful life of 5 years and a residual value of $2,000. Operating costs for the new truck will be $400. The second option is to overhaul its existing truck. The cost of the overhaul will be $6,000. The overhauled truck will have a useful life of 5 years and a residual value of $0. Operating costs for the overhauled truck will be $800. Using Speedy's discount rate of 5%, which option is better and by what amount? ?(Click the icon to view the present value of $1 table.) EEB (Click the icon to view the present value of annuity of $1 table.) O A. O B. O C. O D. Better to purchase new by $18,268 Better to overhaul by $18,268 Better to purchase new by $4,700 Better to overhaul by $4,700Explanation / Answer
PV of cash outflow for Purchase of trucks = PV of annual Operating cost+Purchase Cost-PV of residual value
= [Annual Operating Cost*PVAF(5 yrs, 5%)]+Purchase Cost-[Residual Value*PVF(5 yrs, 5%)]
= ($400*4.329)+$14,000-($2,000*0.784)
= $1,713.60+$14,000-$1,568 = $14,145.60
PV of cash outflow for Overhaul = PV of Annual Operating cost+Overhaul Cost
= [Annual Operating Cost*PVAF(5 yrs, 5%)]+Overhaul Cost
= ($800*4.329)+$6,000
= $3,463.20+$6,000 = $9,463.2
The present value of cash outflows for purchase of $14,145.60 is more than the present value of cash outflows for overhaul of $9,463.20. Therefore it is better to overhaul the truck by the amount of $4,682.4 ($14,145.60-$9,463.20).
Hence the correct option is D) Better to overhaul by $4,700.
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