Nancy’s Notions pays a delivery firm to distribute its products in the metro are

Question

Nancy’s Notions pays a delivery firm to distribute its products in the metro area. Delivery costs are $31,500 per year. Nancy can buy a used truck for $9,500 that will be adequate for the next 4 years. Operating and maintenance costs are estimated to be $24,000 per year. At the end of 4 years, the used truck will have an estimated salvage value of $4,200. Nancy’s MARR is 22%/year.

A) What is the annual worth of this investment?

B) What is the decision rule for judging the attractiveness of investments based on annual worth?

C) Should Nancy buy the truck?

Explanation / Answer

A The annual worth of this investment $4451

Net present value of this investment is $11098

Nancy should buy the truck

Year outflow Net annual saving Salvage Net cash flow DF @22% PV 0 -9500 -9500 1 -9500 1 7500 7500 0.819672 6148 2 7500 7500 0.671862 5039 3 7500 7500 0.550707 4130 4 7500 4200 11700 0.451399 5281 2.494 11098 Annualised saving 4451 Saving in delivery cost 31500 Less Operating and maintenance cost -24000 Net annual saving 7500

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