Question

04.02-PR015 Nancy's Nations pays a delivery firm to distribute its products in the metre aree Delivery costs are $10,000 per year. Nancy can buy a used truck for $10,000 that will be adequate for the next 3 years. Operating and maintenance costs are estimated to be $25,000 per year. At the end of years, the used truck will have an estimated salvage value of $3,000. Nancy's MARR is 24"year. What is the present worth of this investment? 6. What is the decision rule for judging the attractiveness of investments based on present worth? c. Should Nancy buy the truck?

Answer 1

(a)

Cost of used truck = $10,000

Annual operating and maintenance cost = $25,000

Salvage value = $3,000

Useful life = 3 years

It is provided that Nancy at present uses a delivery firm to make the delivery. This cost her $30,000 per year.

If Nancy buys her own truck then she would be able to save this delivery cost.

So,

Annual saving = $30,000

MARR = 24%

Calculate the present worth of the investment -

Present Worth = -Cost of the used truck - Annual operating and maintenance cost (P/A, i, n) + Annual saving (P/A, i, n) + Salvage value(P/F, i, n)

Present worth = - 10,000 - 25,000(P/A, 24%, 3) + 30,000(P/A, 24%, 3) + 3,000(P/F, 24%, 3)

Present Worth = -10,000 - [25,000 * 1.9813] + [30,000 * 1.9813] + [3,000 * 0.5245]

Present Worth = -10,000 - 49,532.50 + 59,439 + 1,573.50

Present Worth = 1,390

The present worth of the investment is $1,390.

(b)

When the present worth of the investment is positive or PW>0, then, investment is attractive.

On the other hand, investment is not attractive when the PW<0.

(c)

The present worth of used truck is $1,390.

The present worth of the used truck is greater than 0, or, PW>0.

Therefore,

Nancy should buy the truck.