XYZ Company is considering the purchase of a new delivery truck. The truck will
ID: 2783596 • Letter: X
Question
XYZ Company is considering the purchase of a new delivery truck. The truck will cost $40,000 and have useful life of 5 years with a salvage value of SO·The new truck is much more efficient than the old delivery truck and should save the company annual cash operating expenses of S 12,000 Straight-line depreciation will be used. The income tax rate is 25% and XYZ Company's hurdle rate is 10%. PRESENT VALUE TABLES ON PAGE 12. 4. Payback is equal to A. 3.44 years B. 3.54 years C. 3.64 years D. 3.74 years 5· The Accounting Rate of Return (ARR) is equal to A. 10.5% B. 9.5% C. 8.5% D. 7.5% 6. The Net Present Value (NPV) is equal to A. $1,701 B. $1,801 C. $1,901 D. $2,001 7. The Profitability Index (P) is equal to A. 94 B. 1.04 C. 1.14 D. 1.24 8. The Internal Rate of Return (IRR) is equal to A. 9,7% B. 10.7% D. 12.7%Explanation / Answer
4) Payback period is the no. of years it takes to recover the investment
We can see that we recover 40,000 in year 4. PBP = 3 + (40,000 - 11,000 x 3) / 11,000 = 3.64 years
5) AROR = Average Net Income / Investment = 3,000 / 40,000 = 7.5%
6 & 7, 8) NPV and IRR can be calculated using the same function on a financial calculator or excel
NPV = 1,699 (A - The difference might be due to rounding error)
PI = 1 + NPV/CF0 = 1 + 1699 / 40,000 = 1.04
IRR = 11.65% (C)
0 1 2 3 4 5 Investment -40,000 Savings 12,000 12,000 12,000 12,000 12,000 Depreciation -8000 -8,000 -8,000 -8,000 -8,000 EBT 4,000 4,000 4,000 4,000 4,000 Tax (25%) -1000 -1,000 -1,000 -1,000 -1,000 Net Income 3,000 3,000 3,000 3,000 3,000 Cash Flows -40,000 11,000 11,000 11,000 11,000 11,000 Payback 3.64 AROR 7.50% NPV $1,699 PI 1.04 IRR 11.6%Related Questions
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