Question

You are considering investing in a project which would involve upgrading your firm's delivery vehicle. The new vehicle is expected to save 10,000 per year in gasoline and other expenses and would cost40,000 to purchase. You expect the vehicle would have a useful life of 5 years then would need to be retired from service with no alternate uses, and no salvage value. Your treasurer believes your firm's WACC (Weighted Average Cost of Capital), the rate you need to earn on projects in order to keep from destroying value, is 15

1) Yes, because the savings in expenses will outweigh the cost of the vehicle
2) No, because the cost of the vehicle is too high compared to the savings in expenses
3) Cannot be determined without additional information

Answer 1

To determine whether it is beneficial to invest in the new delivery vehicle, we need to calculate the Net Present Value (NPV) of the project. The NPV takes into account the present value of the savings in expenses and compares it to the cost of the vehicle. If the NPV is positive, then the project is financially viable.

Step-by-step explanation:

To determine whether it is beneficial to invest in the new delivery vehicle, we need to calculate the Net Present Value (NPV) of the project. The NPV takes into account the present value of the savings in expenses and compares it to the cost of the vehicle. If the NPV is positive, then the project is financially viable.

The NPV of the project can be calculated using the formula:

NPV = Cash Flow / (1 + WACC)^n - Initial Investment

In this case, the Cash Flow is the annual savings of $10,000, the WACC is 15%, the useful life of the vehicle is 5 years, and the Initial Investment is $40,000. Plugging in these values, we can calculate the NPV.

NPV = 10,000 / (1 + 0.15)^5 - 40,000 = $2,498.13

The NPV is positive, which means that the savings in expenses outweigh the cost of the vehicle. Therefore, it would be beneficial to invest in the new delivery vehicle.

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