The garden supply company is also considering taking out a loan and buying a small truck to save costs on deliveries. The truck costs $60,000 and is expected to earn end of year after tax net cash inflows of $10000, $15000, $20000 and $20000 for the next four years before it wears out sufficiently to be unreliable and must be sold for an estimated $10000 (after tax). Required Calculate the NPV of the truck if the interest rate on the loan is 5% pa. Calculate the NPV of the truck if the interest rate on the loan is 10% pa. Advise management of your recommendation regarding purchase of the truck based on your NPV calculations.
The garden supply company is also considering taking out a loan and buying a small truck to save costs on deliveries. The truck costs $60,000 and is expected to earn end of year after tax net
Required
- Calculate the
NPV of the truck if the interest rate on the loan is 5% pa. - Calculate the NPV of the truck if the interest rate on the loan is 10% pa.
- Advise management of your recommendation regarding purchase of the truck based on your NPV calculations.
- 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?
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