The garden supply company is also considering taking out a loan and buying a small truck to save costs on deliveries. The truck costs $60000 and is expected to earn end of year after tax net cash inflows of $11000, $17000, $20000 and $20000 for the next four years before it wears out sufficiently to be unreliable and must be sold for an estimated $18000 (after tax). a) Calculate the NPV of the truck if the interest rate on the loan is 4.0% pa. b) Calculate the NPV of the truck if the interest rate on the loan is 10.7% pa. c) Advise management of your recommendation regarding purchase of the truck based on your NPV calculations. d) Calculate the accounting rate of return on the truck investment. e) What additional advice would you give management if the required payback period was three years?

NPV stands for net present value which implies the concept of evaluating the value of future…

Answered: g out a loan and buying a small truck…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter3: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 8EB: Shonda & Shonda is a company that does land surveys and engineering consulting. They have an...

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The garden supply company is also considering taking out a loan and buying a small truck to save costs on deliveries. The truck costs $60000 and is expected to earn end of year after tax net cash inflows of $11000, $17000, $20000 and $20000 for the next four years before it wears out sufficiently to be unreliable and must be sold for an estimated $18000 (after tax).

a) Calculate the NPV of the truck if the interest rate on the loan is 4.0% pa.

b) Calculate the NPV of the truck if the interest rate on the loan is 10.7% pa.

c) Advise management of your recommendation regarding purchase of the truck based on your NPV calculations.

d) Calculate the accounting rate of return on the truck investment.

e) What additional advice would you give management if the required payback period was three years?

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