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Grover Contracting, Inc., is considering the purchase of a new cement truck costing $150,000. Grover intends to keep the truck for five years before costing $150,000. Grover intends to keep the truck for five years before trading it in on a new one. The truck's estimated salvage value at the end of the five-year period is approximately $25,000. The truck is expected to increase annual income and cash flows by the following amounts: Year Increase in Increase in Net Income Cash Flows 1 37,500 37,500 10,000 12,000 14,000 16,000 37,500 37,500 37,500 $187,500 3 4 18,000 $70,000 Required:

Grover Contracting, Inc., is considering the purchase of a new cement truck costing $150,000. Grover intends to keep the truck for five years before costing $150,000. Grover intends to keep the truck for five years before trading it in on a new one. The truck's estimated salvage value at the end of the five-year period is approximately $25,000. The truck is expected to increase annual income and cash flows by the following amounts: Year Increase in Increase in Net Income Cash Flows 1 37,500 37,500 10,000 12,000 14,000 16,000 37,500 37,500 37,500 $187,500 3 4 18,000 $70,000 Required:

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 6CE
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costing $150,000. Grover intends to keep the truck for five years before Grover Contracting, Inc., is considering the purchase of a new cement truck trading it in on a new one. The truck's estimated salvage value at the end of he five-year period is approximately $25,000. The truck is expected to increase annual income and cash flows by the following amounts: Year Increase in Net Cash Flows 2$ Increase in Income 2$ 37,500 37,500 37,500 37,500 1 10,000 12,000 14,000 3 4 16,000 5 18,000 37,500 $70,000 $187,500 Required: a. Compute the payback period associated with this investment. b. Compute the return on average investment of this proposal. Compute the net present value of this investment if Grover requires a minimum return of с. 12%. d. Comment on your findings.
Transcribed Image Text:costing $150,000. Grover intends to keep the truck for five years before Grover Contracting, Inc., is considering the purchase of a new cement truck trading it in on a new one. The truck's estimated salvage value at the end of he five-year period is approximately $25,000. The truck is expected to increase annual income and cash flows by the following amounts: Year Increase in Net Cash Flows 2$ Increase in Income 2$ 37,500 37,500 37,500 37,500 1 10,000 12,000 14,000 3 4 16,000 5 18,000 37,500 $70,000 $187,500 Required: a. Compute the payback period associated with this investment. b. Compute the return on average investment of this proposal. Compute the net present value of this investment if Grover requires a minimum return of с. 12%. d. Comment on your findings.
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