Bruce Company Is Considering Replacing One of Its Delivery Trucks

question 101

Essay

Bruce Company is considering replacing one of its delivery trucks.The truck in question was purchased two years ago at a cost of $41,000.At the time of purchase the truck was expected to have a $5,000 salvage value at the end of its six-year life.Given the use of straight-line depreciation,the truck has a current book value of $29,000.If sold today,the company could get $22,000 for the truck.It costs $20,000 per year to operate the existing truck.The new truck would cost $46,000 and would cost only $14,000 per year to operate.The new truck would be depreciated on a straight-line basis over its four-year useful life to its expected salvage value of $10,000.The company's required rate of return is 14%.Ignore income taxes.
(PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)
Required:
1)Identify the cash flows for each alternative by completing the following table:
$$\begin{array} { | c | c | c | c | c | } \hline &{ \text { Keep Existing Truck } } && { \text { Replace Existing Truck } } \\\hline \text { Year } & \text { Cash Outflows } & \text { Cash Inflows } & \text { Cash Outflows } & \text { Cash Inflows } \\\hline 0 & & & & \\\hline 1 & & & & \\\hline 2 & & & & \\\hline 3 & & & & \\\hline 4 & & & & \\\hline\end{array}$$
2)The company's objective is to minimize costs.Complete the following table to determine whether the existing truck should be replaced.Ignore income taxes.What is your recommendation?
$\begin{array}{|c|c|c|c|c|c|c|}\hline&&\text { Keep Existing Truck } & &&\text { Replace Existing Truck }\\\hline&14 \% \mathrm{PV} & \text { Net Cash } & \text { Present Value of } && \text { Net Cash } & \text { Present Value of }\\\text { Year } & \text { Factor } & \text { Outflows } & \text { Net Cash Outflows } & & \text { Outflows }& \text { Net Cash Outflows } \\\hline 0 & & & & \\\hline 1 & & & & & \\\hline 2 & & & & & \\\hline 3 & & & & & \\ \hline 4 & & & & & \\\hline\end{array}$

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Definitions:

Low Ball Tactic

A persuasion and selling technique where an initially attractive offer is made to get a commitment, which is then made less attractive before the deal is closed.

Social Influence

The effect that the words, actions, or mere presence of other people have on our beliefs, feelings, attitudes, or behavior.

Heuristic-Systematic Model

A dual-process theory of persuasion that suggests there are two ways people process information: through heuristics (quick, automatic thinking) and systematically (deep, thoughtful analysis).

Systematic Processing

A mode of thinking in which individuals take a more analytical and comprehensive path to evaluating information, as opposed to relying on general impressions.