Palo Alto Corporation is considering purchasing a new delivery truck. The truck

Question

Palo Alto Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company%u2019s current truck (not the least of which is that it runs). The new truck would cost $56,810. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,730. At the end of 8 years the company will sell the truck for an estimated $28,460. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset%u2019s estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company%u2019s cost of capital is 8%.

Explanation / Answer

NPV=-56180+7730/1.108+7730/(1.08)^2........+36190/(1.08)^8=2987.5715

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