Introduction
This report evaluates the viability of new trucks that are to be purchased by Southern Suburbs Transport by calculating the net present value. The report then makes a recommendation on whether the new trucks should be purchased or not.
Net Present Value
Under the net present value method of evaluation, the present value of all money that a project is expected to generate during its life is computed by multiplying those cash flows by the present value interest factor at the firm’s cost of capital. The present value of the cash outflows is then subtracted from the present value of the money expected to be received to get the net present value of the project. If a project has a positive net present value, it means that the present value of the money to be received is higher than the present value of the money to be spent on the project. A project is accepted if it has a net present value that is higher than zero, which means that the present value of the money to be received is higher than the present value of the money to be spent on the project. If the company is choosing between competing projects, the company would prefer the project with the highest payback period (Graham, Smart, & Megginson, 2009).
Using the net present value method of evaluation, the new trucks should not be purchased because it is not a viable project, since the net present value is negative.
Recommendation
Southern Suburbs Transport should not purchase the new trucks because the project has a negative net present value.
Reference
Graham, J, Smart, S, & Megginson, W., 2009. Corporate Finance: Linking Theory to what Companies Do. Ohio: South Western Educational Publishing.