Pompeii's Pizza has a delivery car that it uses for pizza deliveries. The transmission needs to be replaced and there are several other repairs that need to be done. The car is nearing the end of its life, so the options are to either overhaul the car or replace it with a new car. Pompeii's has put together the following budgetary items: Present Car New Car Purchase cost new $31,000 Transmission and other repairs $8,500 Annual cash operating cost 12,000 11,000 Fair market value now 5,000 Fair market value in five years 1,000 5,000 If Pompeii's replaces the transmission of the pizza delivery vehicle, they expect to be able to use the vehicle for another 5 years. If they sell the old vehicle and purchase a new vehicle, they will use that vehicle for 5 years and then trade it in for another new pizza delivery vehicle. If they trade for the new delivery vehicle, their operating expenses will decrease because the new vehicle is more gas efficient and the maintenance on a new car is less. This project is analyzed using a discount rate of 12%. (Click here to see present value and future value tables) A. Calculate the NPV on both Cars. Round your present value factor to three decimal places and the rest to nearest dollar. Present Car $ New Car B. What should Pompeii's do? Pompeii's should retain the present car v
Pompeii's Pizza has a delivery car that it uses for pizza deliveries. The transmission needs to be replaced and there are several other repairs that need to be done. The car is nearing the end of its life, so the options are to either overhaul the car or replace it with a new car. Pompeii's has put together the following budgetary items: Present Car New Car Purchase cost new $31,000 Transmission and other repairs $8,500 Annual cash operating cost 12,000 11,000 Fair market value now 5,000 Fair market value in five years 1,000 5,000 If Pompeii's replaces the transmission of the pizza delivery vehicle, they expect to be able to use the vehicle for another 5 years. If they sell the old vehicle and purchase a new vehicle, they will use that vehicle for 5 years and then trade it in for another new pizza delivery vehicle. If they trade for the new delivery vehicle, their operating expenses will decrease because the new vehicle is more gas efficient and the maintenance on a new car is less. This project is analyzed using a discount rate of 12%. (Click here to see present value and future value tables) A. Calculate the NPV on both Cars. Round your present value factor to three decimal places and the rest to nearest dollar. Present Car $ New Car B. What should Pompeii's do? Pompeii's should retain the present car v
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Pompeii's Pizza has a delivery car that it uses for pizza deliveries. The transmission needs to be replaced and there are several other repairs that need to be done. The car
is nearing the end of its life, so the options are to either overhaul the car or replace it with a new car. Pompeii's has put together the following budgetary items:
Present Car
New Car
Purchase cost new
$31,000
Transmission and other repairs
$8,500
Annual cash operating cost
12,000
11,000
Fair market value now
5,000
Fair market value in five years
1,000
5,000
If Pompeii's replaces the transmission of the pizza delivery vehicle, they expect to be able to use the vehicle for another 5 years. If they sell the old vehicle and purchase
a new vehicle, they will use that vehicle for 5 years and then trade it in for another new pizza delivery vehicle. If they trade for the new delivery vehicle, their operating
expenses will decrease because the new vehicle is more gas efficient and the maintenance on a new car is less. This project is analyzed using a discount rate of 12%.
(Click here to see present value and future value tables)
A. Calculate the NPV on both Cars. Round your present value factor to three decimal places and the rest to nearest dollar.
Present Car $
New Car
$
B. What should Pompeii's do?
Pompeii's should retain the present car v
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