Replacement Decisions [LO2] Your small remodeling business has two work vehicles. One is a small passenger car used for job-site visits and for other general business purposes. The other is a heavy truck used to haul equipment. The car gets 25 miles per gallon (mpg). The truck gets 10 mpg. You want to improve gas mileage to save money, and you have enough money to upgrade one vehicle. The upgrade cost will be the same for both vehicles. An upgraded car will get 40 mpg; an upgraded truck will get 12.5 mpg. The cost of gasoline is $3.70 per gallon. Assuming an upgrade is a good idea in the first place, which one should you upgrade? Both vehicles are driven 12,000 miles per year.
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Chapter 10 Solutions
Fundamentals of Corporate Finance
- Your small remodeling business has two work vehicles. One is a small passenger car used for job-site visits and for other general business purposes. The other is a heavy truck used to haul equipment. The car gets 25 miles per gallon (mpg). The truck gets 10 mpg. You want to improve gas mileage to save money, and you have enough money to upgrade one vehicle. The upgrade cost will be the same for both vehicles. An upgraded car will get 40 mpg; an upgraded truck will get 12.5 mpg. The cost of gasoline is $3.60 per gallon. Calculate the annual fuel savings, in gallons, for the truck and car assuming both vehicles are driven 11,000 miles per year. (Round your answers to 2 decimal places, e.g., 32.16.) Truck Car Fuel savings O Truck O Car gallons per year gallons per year Assuming an upgrade is a good idea in the first place, which one should you upgrade? Both vehicles are driven 11,000 miles per year.arrow_forward3. You are currently without a vehicle and are considering buying either a new fuel efficient Rabbit that costs $40.000 and gets 40 mpg or a used Suburban SUV (sport utility vehicle) that costs $25,000 and gets 12 mpg. Next year you expect to take a new job in Tokyo which will force you to sell your vehicle after one year. We will assume no maintenance costs on either vehicle, but the Rabbit is expected to depreciate by $5000 and the SUV is expected to depreciate by $2000. That is, one year from now you will be able to sell the Rabbit for $35.000 or you will be able to sell the SUV for $23,000. (Note: we are assuming that new cars depreciate more rapidly than used cars.) You have enough savings to pay cash for either vehicle, but the interest rate you can earn on your savings is R=5%. You expect to drive 15,000 miles during the coming year. We will assume that you are indifferent between the two vehicles. How high does the price of gasoline have to be to make it cheaper to buy the…arrow_forwardGive typing answer with explanation and conclusion Your company is contemplating replacing their current fleet of delivery vehicles with Nissan NV vans. You will be replacing 5 fully-depreciated vans, which you think you can sell for $3,700 a piece and which you could probably use for another 2 years if you chose not to replace them. The NV vans will cost $36,000 each in the configuration you want them, and can be depreciated using MACRS over a 5-year life, but you are unable to make use of either bonus depreciation or Section 179 expensing. Expected yearly before-tax cash savings due to acquiring the new vans amounts to about $4,400 each. If your cost of capital is 12 percent and your firm faces a 21 percent tax rate, what will the cash flows for this project be? (Round your answers to the nearest dollar amount.)arrow_forward
- Please don't copy from chegg and show formulasarrow_forwardVd3 You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Kia Rio, which will cost $16,500 to purchase and which will have OCF of −$1,700 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $24,000 to purchase and which will have OCF of −$900 annually throughout that vehicle’s expected 4-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future. If the business has a cost of capital of 13 percent, calculate the EAC. Note: Negative amounts should be indicated by a minus sign. Do not round your intermediate calculations. Round your answers to 2 decimal places.arrow_forward1arrow_forward
- mni.9arrow_forwardQuestion: The management of Health Supplement Inc. wants to reduce its labor cost by installing a new machine. Two types of machines are available in the market – machine X and machine Y. Machine X would cost $18,000 where as machine Y would cost $15,000. Both the machines can reduce annual labor cost by $3,000.Required:Which is the best machine to purchase according to payback method?arrow_forward9 Choose the correct answer below.arrow_forward
- Please answer part d ...need it fastarrow_forwardShonda & Shonda is a company that does land surveys and engineering consulting. They have an opportunity to purchase new computer equipment that will allow them to render their drawings and surveys much more quickly. The new equipment will cost them an additional $1.200 per month, but they will be able to increase their sales by 10% per year. Their current annual cost and break-even figures are as follows: A. What will be the impact on the break-even point if Shonda & Shonda purchases the new computer? B. What will be the impact on net operating income if Shonda & Shonda purchases the new computer? C. What would be your recommendation to Shonda & Shonda regarding this purchase?arrow_forwardPlease show all workarrow_forward
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College