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Joe Biggs is considering starting an ice cream truck business. His research reveals that he can purchase a used truck for R250,000. He estimates that the truck will last for three years, and he will be able to sell enough ice cream to generate after-tax cash flows of R200,000 during each of those years. Another ice cream truck is also for sale for R250,000. This truck is smaller and will not be able to hold as much frozen ice-cream. However, the truck is newer, with lower mileage, and Biggs estimates that he can use it for six years. This newer truck will allow him to generate after-tax cash flows of R150,000 each year for the next six years. Assuming Biggs’ cost of capital is 10%, which truck must he buy? Why?

Sagot :

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