Study Appendix 11. (This problem is similar to Problem 11-56, but the numbers are different and it includes taxes and inflation elements.) The Green Lighting Company produces industrial and residential lighting fixtures at its manufacturing facility in Scottsdale. The company currently ships products to an eastern warehouse via common carriers at a rate of $.26 per pound of fixtures (expressed in year-zero dollars). The warehouse is located in Cleveland, 2,500 miles from Scottsdale. The rate will increase with inflation.

Alexis Azra, the treasurer of Green Lighting, is currently considering whether to purchase a truck for transporting products to the eastern warehouse. The following data on the truck are available: 

Purchase price …………………… $50,000

Useful life ………………………… 5 years

Salvage value after 5 years ………………. 0

Capacity of truck ………………… 10,000 lb

Cash costs of operating truck …. $.90 per mile

Azra feels that an investment in this truck is particularly attractive because of her successful negotiation with Jetson to back-haul Jetson’s products from Cleveland to Scottsdale on every return trip from the warehouse. Jetson has agreed to pay Green Lighting $2,400 per load of Jetson’s products hauled from Cleveland to Scottsdale for as many loads as Green Lighting can accommodate, up to and including 100 loads per year over the next 5 years.

Green Lighting’s marketing manager has estimated that the company will ship 500,000 pounds of fixtures to the eastern warehouse each year for the next 5 years. The truck will be fully loaded on each round trip.

Make the following assumptions:

a. Green Lighting requires a 20% after-tax rate of return, which includes a 10% element attributable to inflation.

b. A 40% tax rate.

c. MACRS depreciation based on 5-year cost recovery period.

d. An inflation rate of 10%.

1. Should Green Lighting purchase the truck? Show computations to support your answer.

2. What qualitative factors might influence your decision? Be specific.