Concept explainers
Present Value, Present Value of an Ordinary Annuity, Analysis of Alternatives. Boyne Painting Contractors needs to purchase a new truck. The owner is considering two different truck models that are currently on the market. Boyne’s two alternatives are presented here:
Truck A: Boyne can purchase Truck A for $45,000. The truck has a useful life of 12 years and will require annual maintenance costs of $1,500 each year. Boyne expects to sell the truck for $7,000 after 12 years.
Truck B: Boyne can purchase Truck B for $40,000. This truck also has a useful life of 12 years but will have no scrap value. It will require maintenance costs every four years as follows:
Year 4: | $3,000 |
Year 8: | $6,000 |
Year 12: | $8,000 |
Which truck should Boyne purchase given an interest rate of 6% compounded annually? Assume that maintenance costs will be paid at year-end.
Want to see the full answer?
Check out a sample textbook solutionChapter 7 Solutions
INTERMEDIATE ACCOUNTING
- Your landscaping company can lease a truck for $9,000 a year (paid at year-end) for 7 years. It can instead buy the truck for $48,000. The truck will be valueless after 7 years. The interest rate your company can earn on its funds is 8%. a. What is the present value of the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Is it cheaper to buy or lease? c. What is the present value of the cost of leasing if the lease payments are an annuity due, so the first payment comes immediately? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Is it now cheaper to buy or lease?arrow_forwardUse the following information for the next TWO (2) questions: A farm must decide whether or not to purchase a new tractor. The tractor will reduce costs by P2, 000 in the first year, P2, 500 in the second, and P3, 000 in the third and final year of usefulness. The tractor costs P9, 000 today, wihile the above cost savings will be realized at the end of each year. If the interest rate is 7 percent. QUESTION NO. 3 What is the present value of cash inflaw from purchasing the tractor? Your answer QUESTION NO.4 What is the net present volue of purchasing the tractor, accept or reject? Your ariswerarrow_forwardWhich one should you choose?arrow_forward
- Your landscaping company can lease a truck for $8,400 a year (paid at year-end) for 7 years. It can instead buy the truck for $44,000. The truck will be valueless after 7 years. The interest rate your company can earn on its funds is 8%. a. What is the present value of the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Is it cheaper to buy or lease? c. What is the present value of the cost of leasing if the lease payments are an annuity due, so the first payment comes immediately? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Is it now cheaper to buy or lease? Your landscaping company can lease a truck for $8,400 a year (paid at year-end) for 7 years. It can instead buy the truck for $44,000. The truck will be valueless after 7 years. The interest rate your company can earn on its funds is 8%. a. What is the present value of the cost of leasing? (Do not round intermediate calculations. Round…arrow_forwardDundar Mifflin is considering the purchase of new printer and have narrowed down the possibilities to two models which perform equally well. However, the method of paying for the two models is different. Model A requires $8,000 per year payment for the next five years. Model B requires the following payment schedule. Payment (Model 2) $10,000 9,000 Year 1 2 8,000 5,000 4 3,000 1. Which model should you buy assuming 12% rate?arrow_forwardNeed answers ASAP... A $2500 computer system can be leased for $79 per month for 3 years. After 3 years, it can be purchased for $750. This is also the salvage value if the system was purchased originally. What is the effective annual rate for leasing the computer?arrow_forward
- (Equivalent annual annuity) Rib & Wings-R-Us is considering the purchase of a new smoker oven for cooking barbecue, ribs, and wings. It is looking at two different ovens. The first is a relatively standard smoker and would cost $52,000, last for 7 years, and produce annual free cash flows of $16,000 per year. The alternative is the deluxe, award- winning Smoke-alator, which costs $78,000 and, because of its patented humidity control, produces the "moistest, tastiest barbecue in the world." The Smoke-alator would last for 15 years and produce free cash flows of $22,000 per year. Assuming a required rate of return of 10 percent on both projects, compute their equivalent annual annuities (EAAs). The EAA of the standard smoker is $ The EAA of the Smoke-alator is $ (Round to the nearest dollar.) (Round to the nearest dollar.) Rib & Wings-R-Us should purchase the (Select from the drop-down menu.)arrow_forwardThe Atlantic Medical Clinic can purchase a new computer system that will save $7,000 annually in billing costs. The computer system will last for nine years and have no salvage value. Click here to view Exhibit 14B-1 and Exhibit 14B-2 to determine the appropriate discount factor(s) using tables. Required: What is the maximum price (l.e., the price that exactly equals the present value of the annual savings in billing costs) Atlantic Medical Clinic should be willing to pay for the new computer system if the clinic's required rate of return is: Note: Round your final answer to the nearest whole dollar amount. Maximum Price 1. Seven percent 2. Eleven percentarrow_forwardYour landscaping company can lease a truck for $8,200 a year (paid at year-end) for 5 years. It can instead buy the truck for $35,000. The truck will be valueless after 5 years. The interest rate your company can earn on its funds is 6%. a. What is the present value of the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Is it cheaper to buy or lease? c. What is the present value of the cost of leasing if the lease payments are an annuity due, so the first payment comes immediately? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Is it now cheaper to buy or lease?arrow_forward
- CCAManufacturing is considering replacing a broken metal cutting machine. Several options have been proposed. Option 1: The broken machine can be sold today for P 15,000 Option 2: It can be overhauled completely for P20000 after which it will produce P8000in annual cashflow over the next 5 years. The resale value of the asset at the end of 5years is 3,000 Option 3: It can be replaced for P 35,000. The life of the replacement Machine is 5 years and an estimated salvage value of of P15,000 At the end of 5 years. Anticipated operating cash inflows for each year will be P12,000. If firm's requirement rate is 12%, which option is most viable? Factor Table - i = 12.00% P/F P/A P/G F/P F/A A/P A/F A/G 0.8929 0.8929 0.000 L.1200 1.0000 1.1200 1.000 0.000 2 0.7972 1.6901 0.7972 1.2544 2.1200 0.5917 0.4717 0.4717 2.4018 3.0373 3 0.7118 2.208 1.4049 3.3744 0.4163 0.2963 0.9246 4 0.6355 4.1273 1.5735 4.7793 0.3292 0.2092 1.389 5 0.5674 3.6048 6.3970 1.7623 6.3528 0.2774 0.1574 1.7746 Option 1 PV=…arrow_forwardThe Atlantic Medical Clinic can purchase a new computer system that will save $6,000 annually in billing costs. The computer system will last for seven years and have no salvage value. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Required: What is the maximum price (i.e., the price that exactly equals the present value of the annual savings in billing costs) that the Atlantic Medical Clinic should be willing to pay for the new computer system if the clinic’s required rate of return is: (Round your final answer to the nearest whole dollar amount.) Maximum Price 1. Seven percent 2. Nine percentarrow_forwardA farmer is about to make a lease or buy decision about a tractor. The tractor is financed at an interest rate of 8% for seven years, with an annual payment of $10 564. The cash flows of both options for seven years and the factors taken into consideration are summarized in the table below. Also, it is assumed that there are no repair costs associated with leasing the equipment. (a) Using net present value of cost, determine the best approach for the farmer. Purchase (b) Explain why fuel cost is not included in the comparison.arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTFundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College