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Calculate the payback period of investment

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Question - Radiant Industries is considering an investment in a fleet of 10 delivery vehicles to take its products to customers. The vehicles will cost $55,000 each to buy, payable in full immediately. The annual running costs are expected to be $54,000 for each vehicle (including driver's salary). The vehicles are expected to operate successfully for six years, at the end of which period they will all have to be scrapped, with disposal proceeds expected to be about $11,500 per vehicle. At present the business uses a commercial carrier for all its deliveries. It expects this carrier to charge a total of $740,000 each year for the next six years to make the deliveries. Radiant industries uses a 11.5% required rate of return to analyse its investment proposal.

(a) Calculate the Accounting Rate of Return of investing in the delivery vehicles.

(b) Calculate the Payback Period of investment in the delivery vehicles.

(c) Calculate the Net Present Value of the proposed investment in delivery vehicles.

(d) Based on your calculations in (a), (b), and (c) above, you are required to advice Radiant Industries if it should invest in the 10 delivery vehicles or continue using the commercial carrier for it deliveries.

(e) List one reason why investment projects must be analysed before the investments are made.

Reference no: EM133062314

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