NMQ Trucking Inc. (NMQ) is considering purchasing tractor trailers to be used for hauling freight for its customers. The purchase cost will be $1,800,000, and the tractor trailers are expected to last four years. At the end of the four years, the tractor trailers will be sold for an estimated $200,000 in net proceeds. These tractor trailers qualify for capital cost allowance (CCA) at a rate of 40% declining balance (Class 40) and is eligible for the accelerated investment incentive rules (ACII) for CCA. NMQ has forecasted sales and costs to be as follows: Sales will be $850,000 in Year 1, $900,000 in Year 2, $950,000 in Year 3, and $980,000 in Year 4. • Operating costs will be 25% of the sales each year. • Wages will be the same for all four years at $100,000 per year. There will be an initial investment in net working capital required of $50,000. NMQ uses a discount rate of 9% for these types of projects and it is subject to tax at a rate of 30%. Required: a) Calculate the net present value for the purchase of the new tractor trailers and provide a conclusion on whether NMQ should proceed with this purchase. b) One manager has suggested that NMQ use the payback period method to determine if the purchase should be made. In comparing the net present value method to the payback period method, discuss two advantages and two disadvantages of the payback period method for NMQ.
NMQ Trucking Inc. (NMQ) is considering purchasing tractor trailers to be used for hauling freight for its customers. The purchase cost will be $1,800,000, and the tractor trailers are expected to last four years. At the end of the four years, the tractor trailers will be sold for an estimated $200,000 in net proceeds. These tractor trailers qualify for capital cost allowance (CCA) at a rate of 40% declining balance (Class 40) and is eligible for the accelerated investment incentive rules (ACII) for CCA. NMQ has forecasted sales and costs to be as follows: Sales will be $850,000 in Year 1, $900,000 in Year 2, $950,000 in Year 3, and $980,000 in Year 4. • Operating costs will be 25% of the sales each year. • Wages will be the same for all four years at $100,000 per year. There will be an initial investment in net working capital required of $50,000. NMQ uses a discount rate of 9% for these types of projects and it is subject to tax at a rate of 30%. Required: a) Calculate the net present value for the purchase of the new tractor trailers and provide a conclusion on whether NMQ should proceed with this purchase. b) One manager has suggested that NMQ use the payback period method to determine if the purchase should be made. In comparing the net present value method to the payback period method, discuss two advantages and two disadvantages of the payback period method for NMQ.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:NMQ Trucking Inc. (NMQ) is considering purchasing tractor trailers to be used for
hauling freight for its customers. The purchase cost will be $1,800,000, and the tractor
trailers are expected to last four years. At the end of the four years, the tractor trailers
will be sold for an estimated $200,000 in net proceeds. These tractor trailers qualify for
capital cost allowance (CCA) at a rate of 40% declining balance (Class 40) and is
eligible for the accelerated investment incentive rules (ACII) for CCA.
NMQ has forecasted sales and costs to be as follows:
Sales will be $850,000 in Year 1, $900,000 in Year 2, $950,000 in Year 3, and
$980,000 in Year 4.
• Operating costs will be 25% of the sales each year.
Wages will be the same for all four years at $100,000 per year.
There will be an initial investment in net working capital required of $50,000.
NMQ uses a discount rate of 9% for these types of projects and it is subject to tax at a
rate of 30%.
Required:
a) Calculate the net present value for the purchase of the new tractor trailers and
provide a conclusion on whether NMQ should proceed with this purchase.
b) One manager has suggested that NMQ use the payback period method to
determine if the purchase should be made. In comparing the net present value
method to the payback period method, discuss two advantages and two
disadvantages of the payback period method for NMQ.
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