Question

A small trucking company is planning to install a GPS system in each of the five trucks the company owns. Each system costs $4600 to install, has a 5-year useful life, and may be salvaged for $300. Total operating cost for all five systems is $1000 for the first year, increasing by $100 per year thereafter. a. How much new annual net income is necessary to recover the initial investment of the five GIS systems at the annual effective interest rate of 10%? b. The company estimates increased net income of $6000 per year for all five systems. Is this project financially viable at the annual effective interest rate of 10%? Please answer without excel formulas.

Answer 1

i =10%

t = 5 yrs

Total cost of the system = 4600 * 5 = 23000

Total salvage value = 300 * 5 = 1500

Total operating cost = 1000 for first year and increasing by 100 per year

a. Let minimum Annual revenue required be A, then

PW at 10% = 0

-23000 + A*(P/A, 10%,5) -1000*(P/A, 10%,5) -100*(P/G, 10%,5) + 1500*(P/F, 10%,5) = 0

A*(P/A, 10%,5) = 23000 - 1500*(P/F, 10%,5) + 1000*(P/A, 10%,5) +100*(P/G, 10%,5)

A*3.790787 = 23000 - 1500*0.620921 + 1000*3.790787 + 100 * 6.861802

A*3.790787 = 26545.59

A = 26545.59 / 3.790787 = 7002.66

b. As 6000 is less than the minimum revenue required, therefore project is not viable