Layton Company Is Replacing an Old Delivery Van with a New

question 33

Multiple Choice

Layton Company is replacing an old delivery van with a new van. The following data relate to this investment decision:
$\begin{array}{|l|r|}\hline \text { Cost of the new van now } & \$ 20,000 \\\hline \text { Annual cash operating costs of the new Van } & \$ 6,000 \\\hline \text { Useful life of the new van } & 6 \text { years } \\\hline \text { Salvage value of the van at the End of six years } & \$ 2,000 \\\hline \text { Original cost of the old van two years ago } & \$ 18,000 \\\hline \text { Book value of the old van now } & \$ 4,000 \\\hline \text { Salvage value of the old van now } & \$ 1,000 \\\hline \text { Salvage value of the old van six year from now } & \$ 200 \\\hline \text { Annual Cash operating Costs of the old van } & \$ 8,000 \\\hline\end{array}$
The old van is in Class 10 with a maximum CCA rate of $30 \%$ and will last for six more years. The new van is also in Class 10 with a maximum CCA rate of $30 \%$ . The income tax rate is $40 \%$ , and the company's after-tax cost of capital is $10 \%$ .
-What is the incremental cash outlay now for the purchase of the new van?

• A) $17,000.
• B) $19,000.
• C) $20,000.
• D) $21,000.

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Definitions:

NPV

Net Present Value is a financial measure that determines the discrepancy between the present value of money coming in and going out over a certain timeframe.

PI

Stands for Profitability Index, which measures the ratio of payoff to investment of a proposed project.

Dividends

Earnings distributed by an enterprise to its proprietors, commonly resulting from the firm's profit margins.

Constant Growth Rate

The steady rate at which a company’s dividends are expected to grow, often used in valuing stocks with the Gordon Growth Model.