Best Bakery is considering the purchase of a new delivery truck to replace an existing unit. The

Question:

Best Bakery is considering the purchase of a new delivery truck to replace an existing unit. The truck would cost $45,000 and would have a life of 7 years with no salvage value. The existing truck could be sold currently for $4,000, but, if it is kept, it will have a remaining life of 7 years with no salvage value. By purchasing the truck, Best Bakery’s managers would anticipate operating cost savings as follows:

Year Amount

1 .........$5,900

2 ......... 8,100

3 ......... 8,300

4 ......... 8,000

5 ......... 8,000

6 ......... 8,300

7 ......... 9,200

Best Bakery’s cost of capital and capital project evaluation rate is 8 percent.

a. Construct a time line for the purchase of the truck.

b. Determine the payback period. (Ignore taxes.)

c. Calculate the net present value of the truck. (Ignore taxes.)

Net Present Value
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