PA8.
LO 11.4Pompeii’s Pizza has a delivery car that it uses for pizza deliveries. The transmission needs to be replaced and there are several other repairs that need to be done. The car is nearing the end of its life, so the options are to either overhaul the car or replace it with a new car. Pompeii’s has put together the following budgetary items:
If Pompeii’s replaces the transmission of the pizza delivery vehicle, they expect to be able to use the vehicle for another 5 years. If they sell the old vehicle and purchase a new vehicle, they will use that vehicle for 5 years and then trade it in for another new pizza delivery vehicle. If they trade for the new delivery vehicle, their operating expenses will decrease because the new vehicle is more gas efficient and the maintenance on a new car is less. This project is analyzed using a discount rate of 12%. What should Pompeii’s do?
Cash outflows due to purchase - $ 31000
Present Value of Operating costs (for 5 years) - 10000 * 3.605 = $ 36050
Total outflows - $ 67050
Sale of old vehicle - $ 5000
Present Value of Scrap of new car - $ 5000 * 0.567 = $ 2835
Total Inflows - $ 7835
Net outflows - 67050 - 7835 = $ 59215
Repairs - $ 8500
Operating costs - 12500 * 3.605 = $ 45063
Total Outflows - $ 53563
PV of Scrap - 500 * 0.567 = 283
Net outflows - $ 53280
Since the net outflow for purchase of a new car is more than that of repairing the existing one (by $5935) , it is wiser not to purchase a new car and instead continue with the present car by overhauling it.
NOTE - Present value is calculated by discounting at 12% for 5 years and for scrap, the discounting factor of 5th year is used. = (1/(1.12)5)
PA8. LO 11.4Pompeii’s Pizza has a delivery car that it uses for pizza deliveries. The transmission...
Pompeii's Pizza has a delivery car that it uses for pizza deliveries. The transmission needs to be replaced and there are several other repairs that need to be done. The car is nearing the end of its life, so the options are to either overhaul the car or replace it with a new car. Pompeii's has put together the following budgetary items: Present Car New Car Purchase cost new $32,000 Transmission and other repairs $8,000 Annual cash operating cost...
very car that it uses for pizza deliveries. The he options are to either overhaul the car or replace it with a OpenStax Principles of Accounting, Volume 2: Managerial Accounts Chapter 11: Capital Budgeting Decisions PA8. LO 11.4 Pompeii's Pizza has a delivery car that it uses for p sion needs to be replaced and there are several other repairs that need to car is nearing the end of its life, so the options are to either over new car....
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