Roadwheelers Ltd were considering buying an additional lorry but the company had not yet decided which particular lorry to purchase. The lorries had broadly similar technical specifications and each was expected to have a working life of five years.

The following information was available on the lorries being considered:

2. The company charges 25p per mile for all journeys irrespective of the length of journey and the expected annual mileages over the five-year period are:

3. The company’s cost of capital is 10 per cent per annum.

4. It should be assumed that all operating costs are paid and revenues received at the end of year.

5. Present value of £1 at interest rate of 10 per cent per annum:

Required:

(a) (i) Appropriate computations using the net present value method for each of the lorries under consideration.

(ii) A report to the directors of Roadwheelers Ltd advising them as to which specific lorry should be purchased.

(b) A brief outline of the problems encountered in evaluating capital projects.

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Purchase price Estimated scrap value after 5 years Fixed costs other than depreciation Year 1 Year 2 Year 3 Year 4 Year 5 Variable costs per road mile BN Roadhog £40,000 £8,000 £ 2,000 2,000 2,200 2,400 2,400 6p Lorries FX Sprinter £45,000 £9,000 £ 1,800 1,800 1,800 2,000 2,200 8p VR Rocket £50,000 £14,000 £ 1,500 1,500 1,400 1,400 1,400 7p