Problem Two LaRocca company is considering replacing its current delivery truck.

Question

Problem Two LaRocca company is considering replacing its current delivery truck. The current truck cost $45,000 and is expected to last for another three years. A new truck will cost $48,000 and can be sold for $18,000 after three years. The new truck should save $4,000 per year in fuel costs as it has a more efficient engine. The old truck will need a new set of tires in two years at a cost of $700. The old truck has a current selling price of $6,000 and a selling price at the end of three years is expected to be $2,500. Period 8% on a w N - Compute the net present value of this investment using a three-year time frame and an 8% return. 0.926 1.783 2.577 3.312 3.993 4.623 NPV =

Explanation / Answer

Calculation of NPV Year 0 1 2 3 NPV Purchase cost of new truck -$48,000.00 Sale value of old truck $6,000.00 Incremental Sale value of truck ($18000 - $2500) $15,500.00 Saving in fuel costs $4,000.00 $4,000.00 $4,000.00 Saving in tyre cost $700.00 Net Cash Flow -$42,000.00 $4,000.00 $4,700.00 $19,500.00 Discount Factor @ 8% 1     0.92593     0.85734       0.79383 Present Values -$42,000.00 $3,703.70 $4,029.49 $15,479.73 -$18,787.08 NPV = -$18,787.08

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