Question

Your team asks VTEPS, Inc. to purchase a light duty delivery truck for $15,000. It is anticipated that the purchase of the truck will increase revenue by $10,000 annually, but have operating expenses of $3,000 per year. If your teams plans to sell the truck after two years, what is the minimum that your team can sell the truck for (i.e., MV) after 2 years in order for this to be profitable for VTEPS, Inc.?And what is the maximum that your team can purchase the truck for after in order for this to be profitable for VTEPS, Inc.?

MARR:18%

Answer 1

Intial price of the truck is $15,000. The revenue is increased by $10,000 annually. There will be an operating expenses of $3,000 per year.

You plan to sell the truck after two years, for a expected salvage value of S. For the truck to be a profitable venture, the minimum value 'S' can take is given by its present worth which should be positive

PW > or = 0

-15000 + (10000 -3000)(P/A, 18%, 2) + S(P/F, 18%, 2) > or = 0

-15000 + 7000*1.56564 + S*0.71818 > or = 0

This gives S* > or = 4040.52/0.71818 or 5626. This is the minimum market value you could sell the truck for to have a profitable investment.

The maximum that your team can purchase the truck for after in order for this to be profitable depends on the salvage value or the market value. If you can sell the truck at $5626, than the maximum you can pay is $15000. The higher is the market value, the greater will be the purchase price.