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Question - Garden Enterprises is considering buying a truck to transport its various aged trees. This truck which would costs $156 000 is expected to earn annual net cash inflows of negative $35,000 in the current year (specialised set up costs of the truck for tree transportation) followed by positive cash flows of $62 000, $62 000, $57 000, $41 900 and $36 500 in the following 5 years before it wears out sufficiently to be unreliable and will be sold for an estimated $32 200.
Required -
a. If funds can earn 5 per cent, what is the small trucks NPV?
b. If funds earn 7 per cent, what is the small trucks NPV?
c. Advise management on your recommendation regarding purchase of the truck subsequent to your NPV calculations.
d. What advice would you give management?
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