HWK6 - .. + F_10/(1.12)^10 where 1.12 = 1 + minimum rate of...

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ECON 2010 HWK 6 The Woodcourt Construction Co is considering purchase of a new dump truck that would allow it to bid on larger projects. The initial purchase price is $128,000 in year 0. The service life of the truck for straight line depreciation Is 10 years (1 to 10). The new truck is forecast to generate extra revenue for the firm of $50,000 per year in 1 to 5 and $60,000 in 6 to 10. Insurance, fuel, maintenance and driver's wages amount to $40,000 per year. Davis requires a minimum rate of return of 0.12. The tax rate on profits in 0.35. Mr. Woodcourt has studied managerial economics and knows the rules of managerial economics and knows the rules for profit-maximizing employment of inputs. Should he invest in this new truck? NPV = -128000/(1.12)^0 + F_1/(1.12)^1 + F_2/(1.12)^2 + .
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Unformatted text preview: .. + F_10/(1.12)^10 where 1.12 = 1 + minimum rate of return, 128000 = initial purchase F = (deltaR deltaC deltaD)*(1-tax) + deltaD where deltaR = revenue, deltaC = cost, deltaD = depreciation, tax = 0.35 deltaR = 50000 for 1 to 5 years, 60000 for 6 to 10 years deltaC = 40000 deltaD = 12800 Therefore F = 10980 for 1 to 5 years, F = 17480 for 6 to 10 years NPV = -128000/(1.12)^0 + 10980/(1.12)^1 + 10980/(1.12)^2 + 10980/(1.12)^3 + 10980/(1.12)^4 + 10980/(1.12)^5 + 17480/(1.12)^6 + 17480/(1.12)^7 + 17480/(1.12)^8 17480/(1.12)^9 + 17480/(1.12)^10 = -52,665.10 A negative NPV indicates a non-profitable solution. Therefore, Mr. Woodcourt should NOT invest in this new truck. Extra Credit: IRR = 0.017806...
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