Reference: 10-14
Jimbob Co Jimbob Co Uses a 10% Discount Rate and the Incremental Cost

Reference: 10-14
Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | r | } \hline & \text { Truck } A & \text { Truck } B \\\hline \text { Purchase cost new } & \$ 50,000 & \$ 70,000 \\\hline \text { Major repairs end of year } 2 & \$ 10,000 & 8,000 \\\hline \text { Annual cash operating costs } & \$ 20,000 & \$ 18,000 \\\hline \text { Salvage value at the end of 3 years } & \$ 15,000 & \$ 20,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years.
-In comparing these two alternatives, which is the correct evaluation

A) Truck A should be purchased as the net present value of the costs of this alternative is the lowest.
B) Truck B should be purchased as the net present value of the costs of this alternative is the highest.
C) Truck B should be purchased as the net present value of the costs of this alternative is the lowest.
D) Truck A should be purchased as the net present value of the costs of this alternative is the highest.

Correct Answer:

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Access For Free