Super Haulers is a hauling company and delivers large and heavy materials to construction job sites. Super Haulers is considering purchasing a new dump truck that costs $185,000 and the managers of Super Haulers have estimated that the new dump truck will generate $50,000 a year in future operating profit for the next four years. At the end of four years, Super Haulers can sell the dump truck at a salvage price of $20,000. If the discount rate is 5 percent, which of the following is true if the managers of Super Haulers are profit- maximizing?
A)The manager should make the investment because the net present value is negative.
B)The manager should not make the investment because the net present value is negative.
C)The manager should make the investment because the net present value is positive.
D)The manager should not make the investment because the net present value is positive.

Question

Quizplus · Accepted Answer

To determine whether the investment is worthwhile or not, the net present value (NPV) of the investment should be calculated. Using a discount rate of 5 percent, the NPV of the investment can be calculated as follows:

NPV = (-$185,000) + ($50,000 / (1 + 0.05)^1) + ($50,000 / (1 + 0.05)^2) + ($50,000 / (1 + 0.05)^3) + ($50,000 / (1 + 0.05)^4) + ($20,000 / (1 + 0.05)^4)
NPV = -$185,000 + $47,619.05 + $45,351.47 + $43,192.35 + $41,132.25 + $14,621.82
NPV = $6,613.94

Since the NPV is positive, the investment is expected to generate a return that exceeds the discount rate, and managers of Super Haulers should make the investment. Therefore, the correct answer is C: The manager should make the investment because the net present value is positive.

Super Haulers Is a Hauling Company and Delivers Large and Heavy