Palo Alto Corporation is considering purchasing a new delivery truck. The truck
ID: 2487506 • Letter: P
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 57,200. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of dollar 7,490. At the end of 8 years the company will sell the truck for an estimated dollar 28,400. 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 0 decimal places, e.g. 125. Round answer for Payback period to 1 decimal place, e.g. 10.5.) Cash payback period year Net present valueExplanation / Answer
Here in the question Net savings given So we have to add Depreciation to get cash generated.
Depreciation p.a = Cost of Asset- Salvage Value/ Life of Asset
=$57,200-28,400/8
=$28,800/8
=$3,600
Annual Cash flow= $7,490+3,600=$11,090
Year
Cash flow
Depreciation
Total Cashflow
cumulative cash flow
0
-57,200
-57,200
1
7,490
3,600
11,090
-46,110
2
7,490
3,600
11,090
-35,020
3
7,490
3,600
11,090
-23,930
4
7,490
3,600
11,090
-12,840
5
7,490
3,600
11,090
-1,750
6
7,490
3,600
11,090
9,340
7
7,490
3,600
11,090
20,430
8
7,490
3,600
11,090
31,520
Payback Period= 5+1,750/11,090
=5+0.16
=5.16 years
Year
Cash flow
Depreciation
Total Cashflow
PV Factor @ 8%
PV
0
-57,200
1
(57,200)
1
7,490
3,600
11,090
0.9259
10,269
2
7,490
3,600
11,090
0.8573
9,508
3
7,490
3,600
11,090
0.7938
8,804
4
7,490
3,600
11,090
0.7350
8,151
5
7,490
3,600
11,090
0.6806
7,548
6
7,490
3,600
11,090
0.6302
6,989
7
7,490
3,600
11,090
0.5835
6,471
8
7,490
3,600
11,090
0.5403
5,992
NPV
6,530
NPV= $6,530
Year
Cash flow
Depreciation
Total Cashflow
cumulative cash flow
0
-57,200
-57,200
1
7,490
3,600
11,090
-46,110
2
7,490
3,600
11,090
-35,020
3
7,490
3,600
11,090
-23,930
4
7,490
3,600
11,090
-12,840
5
7,490
3,600
11,090
-1,750
6
7,490
3,600
11,090
9,340
7
7,490
3,600
11,090
20,430
8
7,490
3,600
11,090
31,520
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