’s Pizza has a delivery car that is 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
Papa John’s Pizza has a delivery car that is 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. Papa John’s has put together the following budgetary items:
|
|
Present Car |
New Car |
|
Purchase cost new |
|
$30,000 |
|
Transmission and repairs |
$6,500 |
|
|
Annual cash operating cost |
$8,500 |
$7,500 |
|
Fair market value now |
$6,000 |
|
|
Fair market value in five years |
$1,000 |
$6,000 |
If Papa John replaces the transmission of the pizza delivery vehicle, they expect to be able to use the vehicle for another 5 years. If they purchase a new vehicle, they will sell the existing one and use the new 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. This project is analyzed using a discount rate of 15%. What should Papa John do?
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