The garden supply company is also considering taking out a loan and buying a small truck to save costs on deliveries. The truck costs $60000 and is expected to earn end of year after tax net cash inflows of $11000, $17000, $20000 and $20000 for the next four years before it wears out sufficiently to be unreliable and must be sold for an estimated $18000 (after tax). a) Calculate the NPV of the truck if the interest rate on the loan is 4.0% pa. Year Transactions Cost flow PV Factor at 4% Discounted cash flows 0 Cost (60,000) 1 (60,000) 1 After-tax net cash inflows 11,000 0.9615 10,577 2 After-tax net cash inflows 17,000 0.9246 15,718 3 After-tax net cash inflows 20,000 0.8890 17,780 4 After-tax net cash inflows 20,000 0.8548 17,096 4 Realizable value after tax 18,000 0.8548 15,386 NPV (16,557) b) Calculate the NPV of the truck if the interest rate on the loan is 10.7% pa. Computing the NPV of the truck if the interest rate on the loan is 4.0% pa as follows: Year Transactions Cost flow PV Factor at 10.7% Discounted cash flows 0 Cost (60,000) 1 (60,000) 1 After-tax net cash inflows 11,000 0.9049 9,954 2 After-tax net cash inflows 17,000 0.8189 13,921 3 After-tax net cash inflows 20,000 0.7411 14,822 4 After-tax net cash inflows 20,000 0.6707 13,414 4 Realizable value after tax 18,000 0.6707 12,073 NPV (4,184) c) Advise management of your recommendation regarding purchase of the truck based on your NPV calculations. As per the evaluations, The NPV of both the trucks is negative but the NPV of the truck at 10.7% shows a comparatively lesser negative sum so the management can look into it. Otherwise, the management should not consider any of these options and instead look for another truck at a better interest rate in order to achieve a positive NPV so that they can positively purchase that truck. d) Calculate the accounting rate of return on the truck investment. e) What additional advice would you give management if the required payback period was three years? Need help with last two please
The garden supply company is also considering taking out a loan and buying a small truck to save costs on deliveries. The truck costs $60000 and is expected to earn end of year after tax net
- a) Calculate the
NPV of the truck if the interest rate on the loan is 4.0% pa.
|
Year |
Transactions |
Cost flow |
PV Factor at 4% |
Discounted cash flows |
|
0 |
Cost |
(60,000) |
1 |
(60,000) |
|
1 |
After-tax net cash inflows |
11,000 |
0.9615 |
10,577 |
|
2 |
After-tax net cash inflows |
17,000 |
0.9246 |
15,718 |
|
3 |
After-tax net cash inflows |
20,000 |
0.8890 |
17,780 |
|
4 |
After-tax net cash inflows |
20,000 |
0.8548 |
17,096 |
|
4 |
Realizable value after tax |
18,000 |
0.8548 |
15,386 |
|
|
|
|
NPV |
(16,557) |
- b) Calculate the NPV of the truck if the interest rate on the loan is 10.7% pa.
Computing the NPV of the truck if the interest rate on the loan is 4.0% pa as follows:
|
Year |
Transactions |
Cost flow |
PV Factor at 10.7% |
Discounted cash flows |
|
0 |
Cost |
(60,000) |
1 |
(60,000) |
|
1 |
After-tax net cash inflows |
11,000 |
0.9049 |
9,954 |
|
2 |
After-tax net cash inflows |
17,000 |
0.8189 |
13,921 |
|
3 |
After-tax net cash inflows |
20,000 |
0.7411 |
14,822 |
|
4 |
After-tax net cash inflows |
20,000 |
0.6707 |
13,414 |
|
4 |
Realizable value after tax |
18,000 |
0.6707 |
12,073 |
|
|
|
|
NPV |
(4,184) |
- c) Advise management of your recommendation regarding purchase of the truck based on your NPV calculations.
As per the evaluations, The NPV of both the trucks is negative but the NPV of the truck at 10.7% shows a comparatively lesser negative sum so the management can look into it.
Otherwise, the management should not consider any of these options and instead look for another truck at a better interest rate in order to achieve a positive NPV so that they can positively purchase that truck.
- d) Calculate the accounting
rate of return on the truck investment.
- e) What additional advice would you give management if the required payback period was three years?
Need help with last two please
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