Bruce Company Is Considering Replacing One of Its Delivery Trucks

question 92

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.
Required:
1) Identify the cash flows for each alternative by completing the following table: $$\begin{array} { | c | c | l | l | l | } \hline &{ \text { Keep Existing Truck } } &&{ \text { Replace Existing Truck } } \\\hline \text { Year } & \text { Cash Outflows } & \text { Cash Inflows } & \text { Cash Outflows } & \text { Cash Inflows } \\\hline 0 & & & & \\\hline 1 & & & & \\\hline 2 & & & & \\\hline 3 & & & & \\\hline 4 & & & & \\\hline\end{array}$$
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? $$\begin{array} { | c | c | c | c | c | c | c | } \hline & & { \text { Keep Existing Truck } } & { \text { Replace Existing Truck } } \\\hline & & & \text { Present Value of } & & & \\\hline & 14 \% & \text { Net Cash } & \text { Net Cash } & & \text { Net Cash } & \text { Present Value of Net } \\\hline \text { Year } & \begin{array} { c } \text { PV } \\\text { Factor }\end{array} & \text { Outflows } & \text { Outflows } & & \text { Outflows } & \text { Cash Outflows } \\\hline 0 & & & & & \\\hline 1 & & & & & \\\hline 2 & & & & & & \\\hline 3 & & & & & & \\\hline 4 & & & & & & \\\hline\end{array}$$

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Definitions:

Aversive Conditioning

A form of behavior therapy that involves repeated association of an undesired behavior with an unpleasant stimulus to reduce the behavior.

Double-blind Procedure

A study design in which neither the participants nor the experimenters know who is receiving a particular treatment, to prevent bias in research results.

Joseph Wolpe

A psychiatrist known for developing systematic desensitization, a process used to reduce phobias and anxieties.

Exposure Therapies

A set of therapeutic techniques used to treat fears and phobias by gradually exposing patients to the feared object or context without any danger, in order to overcome their anxiety.