Management of Ice Cold is contemplating the purchase of twelve new ice cream trucks. The company...

Transcribed Image Text:

Management of Ice Cold is contemplating the purchase of twelve new ice cream trucks. The company plans to establish new routes for each of the trucks near the beaches in Southern California where the weather is pleasant year-round. Considerable research has been performed on estimated demand in consideration of expected larger demand during the summer and weekends. The cash flows of the van models differ due to the freezer capacity and customer windows. The controller has already determined the net present values of the future cash flows for 12 different step vans, the price of which reflects conversion to the company's specifications. Management is ready to make its decision of which step van type to purchase. The company only accepts projects with a minimum profitability index of 2.0. The company's minimum required rate of return is 6%. Data containing the present value of the step van models, future cash flows, initial investments, annual estimated net income, and net present values is provided here for one truck. Step Van Models GMC Utilimaster Freightliner GMC Morgan Olson Chevrolet Workhorse International Econoline Ford Utilimaster Caravan Ford Boutique Grumman Olson Annual Estimated Net Income $14,197 27,778 19,455 27,823 21,087 25,788 17,157 25,300 37,029 20,420 25,674 37,238 Initial investment $55,422 48,135 54,257 79,730 52,303 89,275 68,483 70,337 51,680 48,739 74,537 64,019 PV of Future Cash Flows $126,473 107,462 106,587 117,543 102,071 92,119 94,004 103,209 98,543 114,816 72,601 90,013 Net Present Value $71,051 59,327 52,330 37,813 49,768 2,844 25,521 32,872 46,863 66,077 (1,936) 25,994 Use Excel to perform the following. (a) Calculate the profitability index for each van model. (Round answers to 2 decimal places, e.g. 15.25.) Management of Ice Cold is contemplating the purchase of twelve new ice cream trucks. The company plans to establish new routes for each of the trucks near the beaches in Southern California where the weather is pleasant year-round. Considerable research has been performed on estimated demand in consideration of expected larger demand during the summer and weekends. The cash flows of the van models differ due to the freezer capacity and customer windows. The controller has already determined the net present values of the future cash flows for 12 different step vans, the price of which reflects conversion to the company's specifications. Management is ready to make its decision of which step van type to purchase. The company only accepts projects with a minimum profitability index of 2.0. The company's minimum required rate of return is 6%. Data containing the present value of the step van models, future cash flows, initial investments, annual estimated net income, and net present values is provided here for one truck. Step Van Models GMC Utilimaster Freightliner GMC Morgan Olson Chevrolet Workhorse International Econoline Ford Utilimaster Caravan Ford Boutique Grumman Olson Annual Estimated Net Income $14,197 27,778 19,455 27,823 21,087 25,788 17,157 25,300 37,029 20,420 25,674 37,238 Initial investment $55,422 48,135 54,257 79,730 52,303 89,275 68,483 70,337 51,680 48,739 74,537 64,019 PV of Future Cash Flows $126,473 107,462 106,587 117,543 102,071 92,119 94,004 103,209 98,543 114,816 72,601 90,013 Net Present Value $71,051 59,327 52,330 37,813 49,768 2,844 25,521 32,872 46,863 66,077 (1,936) 25,994 Use Excel to perform the following. (a) Calculate the profitability index for each van model. (Round answers to 2 decimal places, e.g. 15.25.)

Answer rating: 100% (QA)

To calculate the profitability index for each van model we need to divide the net present value NPV ... View the full answer