A delivery service feels they could increase their profits by purchasing a new truck for $53,000. This
Question:
- A delivery service feels they could increase their profits by purchasing a new truck for $53,000. This should lead to increased profits of $16,500 in the 1st year, $14,000 in the 2nd year, and $10,000 in the 3rd year. It could sell the truck at the end of 3 years for $12,500.
a. If the company's required rate of return is 7.5% compounded annually, what is the Discounted Cash Flow (DCF) of the net returns?
b. Is this a worthwhile investment?
Megan's hair salon is considering buying airtime for a television commercial to spread the word about their services and get clients during non-peak hours. Alternatively, they could invest in a cheaper newspaper ad campaign. They forecasted the following cash flows for the two options:
Television: Investment of $6,250 would increase profits by $5,200 in the 1st year and $3,600 in the 2nd year.
Newspaper: Investment of $1,000 today would increase profits by $1,600 in the 1st year and $700 in the 2nd year.
The cost of capital is 17.00%.
A. By calculating the Net Present Value (NPV) of each investment, determine which option is better?
a. Television
b. Newspaper
B. By how much is the profit of the better investment greater than the other investment?
Strategic Management An Integrated Approach
ISBN: 978-1111825843
10th edition
Authors: Charles W. L. Hill, Gareth R. Jones