Hello! I need help with these two problems. Prob #2. Exercise 24-1 Palo Alto Cor

Question

Hello! I need help with these two problems.

Prob #2.

Exercise 24-1 Palo Alto Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). The new truck would cost $56,490. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,430. At the end of 8 years the company will sell the truck for an estimated $27,740. 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's estimated useful life. Larry Newton, a new manager, has suggested that the company should notrey solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company's cost of capital is 8% Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) X Your answer is incorrect. Try again Compute the cash payback period and net present value of the proposed investment. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer for present value to 0 decimal places, e.g. 125. Round answer for Payback period to 1 decimal place, e.g. 10.5.) Cash payback period ears Net present value

Explanation / Answer

Exercise 24 -1:

The annual cash inflows of the project (savings in cost) = 7430

Payback period = 56490/7430 = 7.6 years.

NPV = PV of cash savings annuity of 7430+ PV of residual value of 27740 at the end of 8th year- original cost of 56490

= 7430*PVIFA(8,8) + 27740*PVIF(8,8) - 56490 =

= 7430* 5.74664+27740*0.54027 - 56490 = 42697.54 + 14987.09 - 56490 = 1194.63 = $1,195

Exercise 24-2:

PROJECT Payback-yrs NPV $ AA 2.03 $10,034 BB 1.80 $8,748 CC 1.58 $11,935 Calculations are given below: cumulative PVIF @ Project AA cash flows cash flows 12% PV year 0 -26220 1.0000 -26220 1 11178 11178 0.8929 9980 2 14352 25530 0.7972 11441 3 20838 46368 0.7118 14832 46368 10034 Payback period = 2 + 0.033 = 2.03 years NPV $10,034 cumulative PVIF @ Project BB cash flows cash flows 12% PV year 0 -26220 1.0000 -26220 1 14559 14559 0.8929 12999 2 14559 29118 0.7972 11606 3 14559 43677 0.7118 10363 43677 8748 Payback period =1 + (26220-14559)/14559= 1.80 years NPV $8,748 cumulative PVIF @ Project CC cash flows cash flows 12% PV year 0 -26220 1.0000 -26220 1 18078 18078 0.8929 16141 2 13938 32016 0.7972 11111 3 15318 47334 0.7118 10903 47334 11935 Payback period =1 + (26220-18078)/13938= 1.58 years NPV $11,935

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