Question

In order to avoid hiring an outside firm to perform your firm’s special cargo delivery needs, you consider buying a new truck for $40,000. You have been using a trucking service one day every other week for $200/day, plus $1 per mile. And you always give the driver a $40 tip. Most trips are 80 -100 miles. You estimate that your expense of the new truck will be $0.45/mile plus insurance of $1200/year. You would not hire any additional employees; you would just reallocate their time. After 8 years, you figure the truck will be worth $15,000 at which point you’d sell it. If your cost of capital is 9%, is this a positive NPV project? Hint: lay out the savings from NOT using the service as a positive cash flow. Then, as negative cashflows, layout the cost of buying the truck and doing this yourself. Using excel to figure out cash flow in year 1,2,8 & NPV in year 1,2

Answer 1