XYZ Company is considering the purchase of a new delivery truck. The truck will

Question

XYZ Company is considering the purchase of a new delivery truck. The truck will cost $40,000 and have useful life of 5 years with a salvage value of SO. The new truck is much more efficient than the old delivery truck and should save the company annual cash operating expenses of S 12,000. Straight-line depreciation will be used. The income tax rate is 25% and XYZ Company's hurdle rate is 10%. PRESENT VALUE TABLES ON PAGE 12. 4. Payback is equal to A. 3.44 years B. 3.54 years C. 3.64 years D. 3.74 years 5· The Accounting Rate of Return (ARR) is equal to A. 10.5% B. 9.5% C. 8.5% D. 7.5% 6. The Net Present Value (NPV) is equal to A. $1,701 B. $1,801 C. $1,901 D. $2,001

Explanation / Answer

1)Depreciation =Cost/ useful life

           =40000/5= 8000

Net Income =Annual cash savings -depreciation

           = 12000-8000

           =4000

Net income after tax = 4000[1-.25]=3000

Annual cash flow =Net income after tax+depreciation(non cash)

              = 3000+8000

              = 11000

4)Payback period=Initial investment /cash flow

           =40000/11000

           = 3.64 years

correct option is "c"

5)Accounting rate of return= net income after tax / average investment

       = 3000/40000

       = .075 or 7.5%

correct option is "d"

7)present value = PVA 10%,5*Annal cash flow

= .3.791*11000

= 41701

NPV = present value - initial investment

    = 41701-40000

= 1701

correct option is "a"

    = 1698.65

Related Questions

Navigate

• Browse (All)
• Browse X
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.