Fred’s Freight line is considering the purchase of a new van to replace an existing truck. The van would cost $35,000 and would have a life of seven years with no salvage value at that time. The truck could be sold currently for $4,000; alternatively, if it is kept, it will have a remaining life of seven years with no salvage value. By purchasing the van, Fred’s would anticipate operating cost savings as follows:
|
Year |
Amount |
|
1 |
6,300 |
|
2 |
7,100 |
|
3 |
7,200 |
|
4 |
7,000 |
|
5 |
7,000 |
|
6 |
7,100 |
|
7 |
7,200 |
Fred’s cost of capital and capital project evaluation rate is 12 percent.
a. Construct a time line for the purchase of the van.
b. Determine the payback period (ignore tax).
c. Calculate the net present value of the van (ignore tax).