Luxon Company produces industrial and residential lighting fixtures at its manufacturing facility in Calgary. Shipment of company products to an eastern warehouse is handled by common carriers at a rate of $0.25 per kilogram of fixtures (expressed in Year-0 dollars). The warehouse is located 2,500 kilometres from Calgary. 

The treasurer of Luxon Company is considering whether to purchase a truck for transporting products to the eastern warehouse. The following data on the truck are available: 

Luxon believes that an investment in this truck is particularly attractive because of their successful negotiation with Retro Company to backhaul Retro’s products from the warehouse to Calgary on every return trip from the warehouse. Retro has agreed to pay Luxon $2,400 per load of Retro’s products hauled from the warehouse to Calgary for as many loads as Luxon can accommodate, up to and including 100 loads per year over the next five years. 

The Luxon marketing manager has estimated that 500,000 kilograms of fixtures will have to be shipped to the eastern warehouse each year for the next five years. The truck will be fully loaded on each round trip. 

Make the following assumptions: 

1. Luxon requires a minimum 20 percent after-tax rate of return, which includes a 10 percent element attributable to inflation 

2. The tax rate is 40 percent 

3. The truck qualifies for Class 10, 30 percent declining balance 

4. The inflation rate is 10 percent 

1. Should the truck be purchased? Show computations to support your answer. 

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

Transcribed Image Text:

Purchase price Useful life Terminal residual value Capacity of truck Cash costs of operating $40,000 5 years zero 10,000 kilograms $0.90 per kilometre (expressed in Year-1 dollars) truck