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 ca 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 $ 40,226 x 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 ca 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 $ 40,226 x New Car 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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Question
![**Pompeii's Pizza Vehicle Decision Analysis**
Pompeii's Pizza is considering the future of its delivery vehicle, which is nearing the end of its useful life. The company must decide whether to overhaul the existing car or purchase a new one. Below is the budget analysis for both options:
| | 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 |
**Additional Context:**
- *Usage*: If they replace the transmission of the current vehicle, they plan to use it for another 5 years.
- *Trading for New Vehicle*: If they opt for a new vehicle, it will be used for 5 years before trading it in for another.
- *Savings*: The new vehicle is more fuel-efficient, reducing future operating expenses, and requires less maintenance.
- *Analysis*: Evaluated with a discount rate of 15%.
**Instructions:**
A. **Calculate the NPV (Net Present Value) for both options. Round your present value factor to three decimal places and results to the nearest dollar.**
- Present Car: Result shown is $40,226
- New Car: [Calculation needed]
B. **Decision Recommendation:**
Pompeii’s should *retain the present car* based on the analysis conducted.
*(For detailed NPV calculations, students may refer to present value and future value tables provided via the link.)*
**Feedback:** Prompt discussion or further inquiry based on the displayed figures and suggested decision.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe67b822a-1066-430d-9a54-dac5dc30eee6%2Ffc164816-707f-4250-83f4-c5d53dcaa3fd%2Fxt0axo_processed.png&w=3840&q=75)
Transcribed Image Text:**Pompeii's Pizza Vehicle Decision Analysis**
Pompeii's Pizza is considering the future of its delivery vehicle, which is nearing the end of its useful life. The company must decide whether to overhaul the existing car or purchase a new one. Below is the budget analysis for both options:
| | 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 |
**Additional Context:**
- *Usage*: If they replace the transmission of the current vehicle, they plan to use it for another 5 years.
- *Trading for New Vehicle*: If they opt for a new vehicle, it will be used for 5 years before trading it in for another.
- *Savings*: The new vehicle is more fuel-efficient, reducing future operating expenses, and requires less maintenance.
- *Analysis*: Evaluated with a discount rate of 15%.
**Instructions:**
A. **Calculate the NPV (Net Present Value) for both options. Round your present value factor to three decimal places and results to the nearest dollar.**
- Present Car: Result shown is $40,226
- New Car: [Calculation needed]
B. **Decision Recommendation:**
Pompeii’s should *retain the present car* based on the analysis conducted.
*(For detailed NPV calculations, students may refer to present value and future value tables provided via the link.)*
**Feedback:** Prompt discussion or further inquiry based on the displayed figures and suggested decision.
Transcribed Image Text:**Gallant Sports Analysis of Rock-Climbing Facility Investment**
Gallant Sports is considering investing in a new rock-climbing facility. The company estimates the construction will require an initial investment of $352,000. The projected cash flows are as follows:
- **Year 1**: $(60,000)
- **Year 2**: $141,000
- **Year 3**: $210,000
- **Year 4**: $130,000
*For reference, present value and future value tables are available.*
---
**A. Net Present Value Calculation**
Assuming the analysis is limited to four years due to economic uncertainties, the task is to determine the net present value (NPV) of the rock-climbing facility if the required rate of return is 8%.
- **Calculated NPV**: $24,412 (incorrect)
**B. Investment Decision**
Should the company proceed with developing the facility if the required rate of return is 8%?
- The rock-climbing facility **should not** be developed.
**Feedback**
To verify calculations, discount the cash flows using the appropriate table. Sum the cash flows after applying the factor. Discuss the final result to determine the validity of the investment.
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