Question

Eat at State is considering buying a new food truck. It will cost $65,000, but is expected to generate $20,000 in sales over the next 4 years. At the end of the 4th year, the truck will be sold to Eat Like a Wolverine in Ann Arbor for $10,000 (after taxes). It will require $5,000 in additional Net Working capital that will not be recovered when the truck is sold. The Dean of Food Services will only authorize the purchase if it is cash positive by the end of the 4th year. Using the payback period method, should the truck be purchased, and why

Answer 1

Answer:

It is not advisable to buy the food truck, since over the 4 years of investment it will show a loss of $ 40,000.

Explanation:

Since Eat at State is considering buying a new food truck, and it will cost $ 65,000, but is expected to generate $ 20,000 in sales over the next 4 years, and at the end of the 4th year, the truck will be sold to Eat Like a Wolverine in Ann Arbor for $ 10,000 (after taxes), and it will require $ 5,000 in additional Net Working capital that will not be recovered when the truck is sold, and the Dean of Food Services will only authorize the purchase if it is cash positive by the end of the 4th year, to determine, using the payback period method if the truck should be purchased and why, the following calculation must be performed:

-65,000 + 20,000 + 10,000 - 5,000 = X

-70,000 + 30,000 = X

-40,000 = X

Therefore, it is not advisable to buy the food truck, since over the 4 years of investment it will show a loss of $ 40,000.