Gibson Delivery is a small company that transports business packages between New York and Chicago. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. Gibson Delivery recently acquired approximately $7.0 million of cash capital from its owners, and its president, George Hay, is trying to identify the most profitable way to invest these funds. Todd Payne, the company's operations manager, believes that the money should be used to expand the fleet of city vans at a cost of $820,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by $260,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $101,000. Operating the vans will require additional working capital of $41,000, which will be recovered at the end of the fourth year. In contrast, Oscar Vance, the company's chief accountant, believes that the funds should be used to purchase large trucks to deliver the packages between the depots in the two cities. The conversion process would produce continuing improvement in operating savings and reduce cash outflows as follows. Year 1 $158,000 Year 2 $315,000 Year 3 $400,000 Year 4. $438,000 The large trucks are expected to cost $900,000 and to have a four-year useful life and a $80,000 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to $10,000. Gibson Delivery's management has established a 8 percent desired rate of return. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a.&b. Determine the net present value and present value index for each investment alternative. (Round your intermediate
Gibson Delivery is a small company that transports business packages between New York and Chicago. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. Gibson Delivery recently acquired approximately $7.0 million of cash capital from its owners, and its president, George Hay, is trying to identify the most profitable way to invest these funds. Todd Payne, the company's operations manager, believes that the money should be used to expand the fleet of city vans at a cost of $820,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by $260,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $101,000. Operating the vans will require additional working capital of $41,000, which will be recovered at the end of the fourth year. In contrast, Oscar Vance, the company's chief accountant, believes that the funds should be used to purchase large trucks to deliver the packages between the depots in the two cities. The conversion process would produce continuing improvement in operating savings and reduce cash outflows as follows. Year 1 $158,000 Year 2 $315,000 Year 3 $400,000 Year 4. $438,000 The large trucks are expected to cost $900,000 and to have a four-year useful life and a $80,000 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to $10,000. Gibson Delivery's management has established a 8 percent desired rate of return. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a.&b. Determine the net present value and present value index for each investment alternative. (Round your intermediate
Chapter7: Valuation Of Stocks And Corporations
Section: Chapter Questions
Problem 1lM
Related questions
Question
Transcribed Image Text:Gibson Delivery is a small company that transports business packages between New York and Chicago. It operates a fleet of small
vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between
the depots in the two cities. Gibson Delivery recently acquired approximately $7.0 million of cash capital from its owners, and its
president, George Hay, is trying to identify the most profitable way to invest these funds.
Todd Payne, the company's operations manager, believes that the money should be used to expand the fleet of city vans at a cost of
$820,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the
revenue base. More specifically, he expects cash inflows to increase by $260,000 per year. The additional vans are expected to have
an average useful life of four years and a combined salvage value of $101,000. Operating the vans will require additional working
capital of $41,000, which will be recovered at the end of the fourth year.
In contrast, Oscar Vance, the company's chief accountant, believes that the funds should be used to purchase large trucks to deliver
the packages between the depots in the two cities. The conversion process would produce continuing improvement in operating
savings and reduce cash outflows as follows.
Year 1
$158,000
Year 2
$315,000
Year 3
$400,000
Year 4
$438,000
The large trucks are expected to cost $900,000 and to have a four-year useful life and a $80,000 salvage value. In addition to the
purchase price of the trucks, up-front training costs are expected to amount to $10,000. Gibson Delivery's management has
established a 8 percent desired rate of return. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Required
a.&b. Determine the net present value and present value index for each investment alternative. (Round your intermediate
calculations and final answers to 2 decimal places. Enter your answer in whole dollars and not in millions.)
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 3 images
Recommended textbooks for you
Auditing: A Risk Based-Approach to Conducting a Q…
Accounting
ISBN:
9781305080577
Author:
Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:
South-Western College Pub
Auditing: A Risk Based-Approach to Conducting a Q…
Accounting
ISBN:
9781305080577
Author:
Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:
South-Western College Pub