Lubners Limited operates transport division which offers long haul transport. It has a fleet of trucks which are replaced as the maintenance costs become excessive. One of the trucks needs replacing and Lubners Limited is considering the following purchase: 2
Lubners Limited operates transport division which offers long haul transport. It has a fleet of trucks which are replaced
as the maintenance costs become excessive. One of the trucks needs replacing and Lubners Limited is considering the
following purchase:
2
A Volvo F1350 which costs R1 500 000 for the horse and a further R500 000 for a custom made trailer. This truck will
have a useful life of five years after which it will be sold for 10% of its total purchase cost.
The first alternative is to use this purchase in normal operations in which customers are charged per kilometre
transported and the expected net cash revenue in the first year is expected to be R460 000 and this is expected to
increase by 10% every year.
A second alternative is to use this purchase for a long term contract with an established client. This contract is for a
period of five years with annual cash revenues of R580 000 for each of the five years.
It is company policy to
evaluate capital projects is 12%.
Net present value is the current value of the money received or to be received on a future date. It considers the time value of money, the interest rate charged, and the effect of fluctuations in the value of the currency.
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