A USED CONCRETE PUMPING TRUCK CAN BE PURCHASED FOR 125,000 DOLLARS. THE OPERATING COST ARE EXPECTED TO BE 65,000 DOLLARS AT THE FIRST YEAR & INCREASE BY 5% EACH YAER THEREAFTER. AS A RESULT OF THE PURCHASE, THE COMPANY WILL SEE IN INCREASE IN INCOME OF 100,000 DOLLARS THE FIRST YEAR & 5% MORE EACH SUBSEQUENT YEAR. THE COMPANY USES STRAIGHT LINE DEPRECIATION. THE TRUCK WILL HAVE USEFUL LIFE OF 5 YEARS & NO SALVAGE VALUE. MANAGEMENT WOULD LIKE TO SEE A 10% RETURN ON ANY INVESTMENT. THE COMPANY TAX RATE IS 28%
1. What is the compound interest factor used to determine present value in year number 5?
2. based on the information truck should be purchased or leased
3. taxes due at the end of year 5 ?
4. taxable income in year 5?
5. required sales price to receive a 10% ROR
thanks a lot in advance
For future reference, please do not use capital letters (upper case) because in computer language, it is impolite and for us volunteer teachers it is much more difficult to read. Therefore most of us won't even attempt to read it.
Sra
thanks a lot for your advice
i will correct my mistake
Thanking you once again
1. The compound interest factor used to determine present value in year number 5 can be calculated using the formula:
Compound Interest Factor = (1 + interest rate)^number of years
In this case, the interest rate is 10% (given as the desired return on investment), and the number of years is 5. Plugging in these values into the formula, we get:
Compound Interest Factor = (1 + 0.10)^5 = 1.61
So the compound interest factor used to determine present value in year number 5 is 1.61.
2. To determine whether the truck should be purchased or leased, we need to compare the net present value (NPV) of both options. The NPV is the present value of cash inflows minus the present value of cash outflows.
For the purchase option:
- Cash inflows: The increase in income of $100,000 in the first year, increasing by 5% each subsequent year for 5 years.
- Cash outflows: The initial cost of the truck ($125,000) and the operating costs over 5 years, increasing by 5% each year ($65,000 in the first year and increasing by 5% each subsequent year).
To calculate the present value of these cash flows, we need to discount them using the desired return on investment rate, which is 10%. We multiply each cash flow by the compound interest factor for the respective year (calculated in question 1), and sum them up.
For the lease option:
- Cash inflows: The increase in income of $100,000 in the first year, increasing by 5% each subsequent year for 5 years.
- Cash outflows: The lease cost for the duration of 5 years.
Similar to the purchase option, we need to discount the cash flows for the lease option using the same desired return on investment rate (10%) and calculate the present value.
Compare the NPVs of both options. If the NPV of the purchase option is greater than the NPV of the lease option, then the truck should be purchased. Otherwise, leasing may be a better option.
3. To calculate the taxes due at the end of year 5, we need to determine the taxable income in year 5. Taxable income is calculated by subtracting annual operating costs and depreciation expense from annual income.
In year 5, the annual income will be $100,000 (initial increase) plus the 5% increase in income for each subsequent year. The annual operating costs will be $65,000 (initial cost) plus the 5% increase each subsequent year.
Taxable income in year 5 = Annual income - Annual operating costs - Depreciation expense
4. To calculate the taxable income in year 5, as mentioned in the previous question, subtract the annual operating costs and depreciation expense from the annual income.
Taxable income in year 5 = Annual income - Annual operating costs - Depreciation expense
Remember, the annual income increases by 5% each year, and the operating costs increase by 5% each year.
5. To find the required sales price to receive a 10% return on investment, you need to consider the net present value (NPV) of the cash flows.
The required sales price can be calculated by dividing the present value of the cash inflows by the compound interest factor for year 1. The cash inflows include the increase in income of $100,000 in the first year, increasing by 5% each subsequent year for 5 years.
Divide the present value of the cash inflows by the compound interest factor for year 1 to find the required sales price.
These are the steps you can take to find the answers to the given questions. Make sure to plug in the appropriate values into the formulas and calculations mentioned above to get the accurate results.