(Ignore income taxes in this problem.) Your Company has a truck that needs a new engine that would cost $35,000. This will extend the useful life of the truck by 5 years. As an alternative, Your Company could buy a brand new truck for $120,000. The new truck would also last 5 years. The annual operating expenses of the old truck are $8,500. The annual operating expenses of the new truck will only be $5,000. The old truck has a salvage value of $12,000 now and $3,500 in 5 years. The new truck is expected to have a $10,000 salvage value in 5 years. Your Company discount rate is 6%. What is the net present value of the decision to buy the new truck instead of repairing the old truck

Hence the net cost to the company is 68,160.

NPV to buy a new truck instead of repairing  

NPV = -65390

Explanation:

Step 1:-

P.V. of Old Truck Repaired  

Given  

Discount rate = 6%  

New engine = 35000  

Life = 5 years  

Annual operating expenses = 8500  

Salvage (after 5 years)= 3500

Step 2:-  

Repair  

Net Cost to company  = Cost + Annual operating expenses x P.V. Annuity              

                                               Factor (6%, 5) - Salvage value x P.V. Intrinsic  

                                              Factor (6%, 5)  

 P.V.A.F. (6%, 5)=  

 n = 4.21

 P.V.I.F. (6%, 5) =

Net Cost to company:  = 35000 + 8500 x 4.21 - 3500 x 0.75  

= 35000 + 35785 - 2625  

= 68,160

P.V. of New truck purchased  

New Truck  

Cost = 120000  

Discount rate = 6%  

Life = 5 years  

Annual operating expenses = 5000  

Salvage (after 5 years)= 10000  

Net Cost to company:  = Cost + Annual operating expenses x P.V. Annuity

                                           Factor (6%, 5) - Salvage value x P.V. Intrinsic  

                                                                                            Factor (6%, 5)  

= 120000 + 5000 x 4.21 - 10000 x 0.75  

= 120000 + 21050 - 7500  

= 133550

NPV to buy a new truck instead of repairing  

NPV = Net cost of repairing - Net cost of new truck  

= 68160 - 133550  

= -65390

in terms of experimental research, mcdonald’s charging different prices in the two cities relates to

answer; sensory adaptation;