Question

\The southeast division of a distribution company is planning on purchasing a new delivery truck for $18,500. The current truck has a book value of $5,000 and will be sold immediately. The new truck is expected to increase operating income by $6,000. Additional information is as follows: Current operating assets $800,000 Current operating income $82,500 Minimum rate of return 10% Profit margin 15% Based on the expected change in the return on investment metric, should the truck be purchased? Group of answer choices

Answer 1

the company should purchase the new delivery truck

Step-by-step explanation:

current rate of return without the purchase of the new truck = $82,500 / $800,000 = 10.31% ≥ required rate of return (10%)

operating income increases by $6,000

assets increase by $18,500 - $5,000 = $13,500

rate of return after purchase = $88,500 / $813,500 = 10.88% which is higher than previous rate of return and higher than the required rate of return

since the rate of return will increase if the new truck is purchased, then it should be considered a good investment.