Hello, please assist me with this exercise. Thanks! Linkin Corporation is consid
ID: 2480104 • Letter: H
Question
Hello, please assist me with this exercise. Thanks!
Linkin 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 $56,800. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,300. At the end of 8 years the company will sell the truck for an estimated $27,200. 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 not rely 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%. Compute the cash payback period and net present value of the proposed investment. Cash payback period years Net present value $ Does the project meet the company's cash payback criteria? Does it meet the net present value criteria for acceptance?Explanation / Answer
Answer:a Calculation of the cash payback period:
Cash Payback period=$56800/$8300=6.84 years
Answer:b No, the company does not meet the cash payback criteria because cash payback period is higher than 50% of its estimated useful life.
Yes, NPV is positive so new truck will be purchased.
Particulars Years P.V.F (8%) Amount ($) Cash Flow ($) Truck cost 0 1 -56800 -56800 Savings 8-Jan 5.7466 8300 47696.78 Sale value at the end of year 8 8 0.540269 27200 14695.3168 NPV 5592.0968Related Questions
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