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 $32,000 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 15%. (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 48,228.68 X New Car 61,387.82 X 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 $32,000 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 15%. (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 48,228.68 X New Car 61,387.82 X B. What should Pompeii's do? Pompeii's should retain the present car v
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:**Pompeii's Pizza Vehicle Decision Analysis**
Pompeii's Pizza is evaluating options for replacing its delivery car, which requires a transmission replacement and other repairs. The vehicle is nearing the end of its operational life, prompting a comparison between overhauling the current car and purchasing a new one. The following budgetary details outline the cost considerations:
| Expenses | Present Car | New Car |
|-------------------------------|-------------|-----------|
| Purchase cost new | - | $32,000 |
| 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 |
**Decision Context:**
- **Present Car:** Requires a transmission replacement to remain operational for the next 5 years.
- **New Car:** Offers a more cost-efficient alternative with lower operating expenses due to improved gas efficiency and reduced maintenance.
This analysis uses a discount rate of 15% to determine the Net Present Value (NPV) of both options.
- **Present Car NPV:** $48,228.68
- **New Car NPV:** $61,387.82
**Recommendation:**
Pompeii's should **retain the present car** as per the analysis results.
*Note: Present value tables were utilized for calculations, ensuring precision to three decimal places with final figures rounded to the nearest dollar.*
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