Question

1. A company has just purchased a lift truck for £50,000 that has a useful life of 8 years. The engineer estimates that the maintenance costs by the end of the first year will be £1500 and are expected to increase as the truck ages at a rate of £200 annually over the remaining life. Also, the truck will need an overhaul that cost £5000 by the end of the 3^rdand 6^thyears. The firm decided to set up a maintenance account that earns 15 % to pay for all future maintenance expenses.
   1. Draw the cash flow for the truck costs.
   2. What is the maximum leasing value the company could make to lease a substitute truck?
   3. The lift’s work value is evaluated by £20,000; what is the payback period of the lift?
   4. Based on part (c) above, if the MARR of the company is 18%, does the lift satisfy the company standards? Comment.

Answer 1

a. Maintenance cost for

year 1 :1500

Year 2 : 1500+200

Year 3 : 1500+200+200

and so on

Overhaul cost is mentioned in the question for 3rd year and 6th year.

Purchase cost is allocated in the year 0 as given in the question.

Total cash outflow :

c.

Payback period: the length of time required for an investment to recover its initial outlay in terms of profits or savings.

Initial Outlay: 78,600

60,765 will be recovered by the end of 3rd year.

Amount left to be recovered=  78,600- 60765 = 17835

Inflow in the fourth year = 20315

Payback period= 3 + 17835/20315 years

= 3 + 0.877 years

= 3.087 years

d.

Since the NPV for the project will be positive, the lift does satisfy the company standards.