Reference: 10-14
Jimbob Co Jimbob Co Uses a 10% Discount Rate and the Incremental Cost

question 34

Multiple Choice

Reference: 10-14
Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | r | } \hline & \text { Truck A } & \text { Truck B } \\\hline \text { Purchase cost new } & \$ 50,000 & \$ 70,000 \\\hline \text { Major repairs end of year 2 } & \$ 10,000 & 8,000 \\\hline \text { Annual cash operating costs } & \$ 20,000 & \$ 18,000 \\\hline \text { Salvage value at the end of 3 years } & \$ 15,000 & \$ 20,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years.
-The following data pertain to an investment in equipment: $$\begin{array} { | l | l | } \hline \text { Investment in the project } & \$ 10,000 \\\hline \text { Net annual cash inflows } & \$ 2,400 \\\hline \text { Working capital required } & \$ 5,000 \\\hline \text { Salvage value of the equipment } & \$ 1,000 \\\hline \text { Life of the project } & 8 \text { years } \\\hline\end{array}$$ At the completion of the project, the working capital will be released for use elsewhere. What is the net present value of the project, using a discount rate of 10%?

• A)$1,729.
• B)($1,729).
• C)$606.
• D)$8,271.

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