3. The garden supply company is also considering taking out a loan and buying a small truck to save costs on deliveries. The truck costs $60,000 and is expected to earn end of year after tax net cash inflows of $10000, $15000, $20000 and $20000 for the next four years before it wears out sufficiently to be unreliable and must be sold for an estimated $10000 (after tax). a. Calculate the NPV of the truck if the interest rate on the loan is 5% pa. b. Calculate the NPV of the truck if the interest rate on the loan is 10% pa. C. Advise management of your recommendation regarding purchase of the truck based on your NPV calculations. d. Calculate the accounting rate of return on the truck investment. e. What additional advice would you give management if the required payback period was three years? All working required.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question
3. The garden supply company is also considering taking out a loan and buying a small truck to save costs on deliveries. The truck costs $60,000 and is expected
to earn end of year after tax net cash inflows of $10000, $15000, $20000 and $20000 for the next four years before it wears out sufficiently to be unreliable and
must be sold for an estimated $10000 (after tax).
a. Calculate the NPV of the truck if the interest rate on the loan is 5% pa.
b. Calculate the NPV of the truck if the interest rate on the loan is 10% pa.
c. Advise management of your recommendation regarding purchase of the truck based on your NPV calculations.
d. Calculate the accounting rate of return on the truck investment.
e. What additional advice would you give management if the required payback period was three years?
All working required.
Transcribed Image Text:3. The garden supply company is also considering taking out a loan and buying a small truck to save costs on deliveries. The truck costs $60,000 and is expected to earn end of year after tax net cash inflows of $10000, $15000, $20000 and $20000 for the next four years before it wears out sufficiently to be unreliable and must be sold for an estimated $10000 (after tax). a. Calculate the NPV of the truck if the interest rate on the loan is 5% pa. b. Calculate the NPV of the truck if the interest rate on the loan is 10% pa. c. Advise management of your recommendation regarding purchase of the truck based on your NPV calculations. d. Calculate the accounting rate of return on the truck investment. e. What additional advice would you give management if the required payback period was three years? All working required.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 2 images

Blurred answer
Knowledge Booster
Capital Budgeting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education