ACCT2127-Accounting for Management Decisions

Question

Distance Trucking is considering replacing an existing semi-trailer truck with a more modern long-haul vehicle. The existing truck was purchased 5 years ago at a cost of $180,000 and is being depreciated over its useful life of 10 years at which point it is estimated to have a residual trade in value of $30,000. The existing truck has 5 years of usable life remaining and can currently be sold for $70,000 net.

The new long-haul truck being considered will cost $230,000 plus $15,000 delivery from an interstate dealer. It will be depreciated over its useful life of 5 years having a residual value of $90,000 given it’s still a relatively new vehicle and provide the benefit of reducing cash operating costs by $45,000 per annum.

Required

(a) Based on a required return of 14 per cent cost of capital / time value of money, calculate the Net Present Value (Cost) of continuing to use the existing vehicle (option a – cash flows) versus purchasing the new vehicle (option b cash flows). As part of your answer interpret the meaning of the net present value / cost calculated. (Ignore tax implications. / show all working as part of your answer)

Additional information: The present value of $1, ie. (1+r)-n Where: r = discount rate; n = number of periods until payment.

(b) Provide three other non-financial considerations other than Net Present Value / Cost that should be considered when evaluating the above investment proposal to purchase a more modern truck. (100 words limit)

(c) The general manager at Distance Trucking Ltd says she has heard that the data used in NPV calculations can be unreliable, especially estimates of future cash flows, and that alternative methods of assessing a capital investment would be more reliable. Discuss in your own words the limitations and advantages of NPV analysis over other capital evaluation techniques reviewed throughout the semester.