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's current truck (not the least of which is that it runs). The new truck would cost dollar 57,050. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of dollar 8,420. At the end of 8 years the company will sell the truck for an estimated dollar 28,190. 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 percentage 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 percentage. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) 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 O decimal places, e.g. 125. Round answer for Payback period to 1 decimal place, e.g. 10.5.) 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

PBP Time Amount Cumulative                                                                                       -        (57,050.00)         (57,050.00)                                                                                  1.00          8,420.00         (48,630.00)                                                                                  2.00          8,420.00         (40,210.00)                                                                                  3.00          8,420.00         (31,790.00)                                                                                  4.00          8,420.00         (23,370.00)                                                                                  5.00          8,420.00         (14,950.00)                                                                                  6.00          8,420.00           (6,530.00)                                                                                  7.00          8,420.00             1,890.00                                                                                  8.00        36,610.00           38,500.00 PBP= 6 + 6,530 / 8,420 PBP= 6.78 Years Statement showing Cash flows Particulars Time PVf@8% Amount PV Cash Outflows                       -                        1.00                         (57,050.00)                         (57,050.00) PV of Cash outflows = PVCO                         (57,050.00) Cash inflows                   1.00                 0.9259                              8,420.00                              7,796.30 Cash inflows                   2.00                 0.8573                              8,420.00                              7,218.79 Cash inflows                   3.00                 0.7938                              8,420.00                              6,684.07 Cash inflows                   4.00                 0.7350                              8,420.00                              6,188.95 Cash inflows                   5.00                 0.6806                              8,420.00                              5,730.51 Cash inflows                   6.00                 0.6302                              8,420.00                              5,306.03 Cash inflows                   7.00                 0.5835                              8,420.00                              4,912.99 Cash inflows = 8420 + 28190                   8.00                 0.5403                           36,610.00                           19,779.24 PV of Cash Inflows =PVCI                           63,616.88 NPV= PVCI - PVCO                              6,566.88 No it does not meet companys payback criteria as its payback period of 6.78 years is more than required payback period of less than 4 Years(8*50%) Yes it meet NPV criteria for acceptance and thus it should be accepted

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