Your company isanticipating buying more trucks for its service division. New tru

Question

Your company isanticipating buying more trucks for its service division. New trucks have lower operating costsbut higher front end costs New trucks last for 5 years. Used trucks can be purchased for lessmoney, have higher operating costs and will last 3 years. Assume $0 salvage value Truck Costs Truck Revenues Truck Annual Expenses (inclusive) All years New     21,000        15,000             6,750 constant for 5 years Used     10,500        15,000             8,000 constant for 3 years Use 15% as your cost of capital forthis problem. Which is the best solution, buying newtrucks or buying used trucks? What is the maximum number of years used in thisevaluation? How much annual savings is realized if a new truckis purchased over an old truck? What is the initial savings if a new truck ispurchased over an old truck? Which is the better investment according toNPV? WILL RATE LIFESAVER, NEEDCORRECT ANSWERS BADLY!!!! Also need the formulas to show howto get to the answers. Your company isanticipating buying more trucks for its service division. New trucks have lower operating costsbut higher front end costs New trucks last for 5 years. Used trucks can be purchased for lessmoney, have higher operating costs and will last 3 years. Assume $0 salvage value Truck Costs Truck Revenues Truck Annual Expenses (inclusive) All years New     21,000        15,000             6,750 constant for 5 years Used     10,500        15,000             8,000 constant for 3 years Use 15% as your cost of capital forthis problem. Which is the best solution, buying newtrucks or buying used trucks? What is the maximum number of years used in thisevaluation? How much annual savings is realized if a new truckis purchased over an old truck? What is the initial savings if a new truck ispurchased over an old truck? Which is the better investment according toNPV?

Explanation / Answer

x.Xtable style="border-right: 2px solid; padding-right: 1px; border-top: 2px solid; padding-left: 1px; padding-bottom: 1px; margin: 1px; border-left: 2px solid; width: 410pt; padding-top: 1px; border-bottom: 2px solid; border-collapse: collapse; background-color: #fffee8" cellspacing="0" cellpadding="0" width="546" border="0"> New Trucks Cost of Capital 15% Now Year 1 Year 2 Year 3 Year 4 Year 5 Purchase cost -21,000 Truck Revenues 15,000 15,000 15,000 15,000 15,000 Annual Expenses -6,750 -6,750 -6,750 -6,750 -6,750 Depreciation -4,200 -4,200 -4,200 -4,200 -4,200 Earnings before taxes 4,050 4,050 4,050 4,050 4,050 Taxes 0 0 0 0 0 Earnings after taxes 4,050 4,050 4,050 4,050 4,050 Add back Depreciation 4,200 4,200 4,200 4,200 4,200 Net Cash Flow -21,000 8,250 8,250 8,250 8,250 8,250 PV discount factor @ 15% 1.00 0.870 0.757 0.658 0.572 0.498 PV of Cash flows -21000 7,178 6,245 5,429 4,719 4,109 NPV Total -21,000 + 7,178 + 6,245 + 5,429 + 4,719 + 4,109 6,680

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