Answer Happy

Success P/L is evaluating the purchase of a new delivery
truck based on the
following data:
Cost of truck: $22,500
Useful life: 5 years ($0 salvage value)
Sales revenue per year: $6,260
Operating expenses excluding depreciation per year: $10
Net operating cashflows per year: $6,250
Discount rate/ Cost of Capital: 10%
Required:
a. Assuming Success P/L decides to operate the truck for
the full 5 years until the
end of its physical life, compute the following:
(Show your formulas and computations clearly)
i Payback Period (5 marks)
ii Average Accounting Return (10 marks)
iii Profitability Index (5 marks)
iv Net Present Value (10 marks)
v Internal Rate of Return (10 marks)
b. Suppose the truck has a salvage value at the end of each
year as shown in the table below:

Year 1 Year 2
Year 3 Year 4
Year 5
Salvage Value 17,500 14,000 11,000
5,000
0
Should the firm operate the truck until the end of it’s 5-year
physical life, or if not, what
is its optimal economic life?