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 $56,080. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,400. At the end of 8 years the company will sell the truck for an estimated $28,030 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% (Refer the below table) TABLE 3 Present Value of 1 Periods 4% .96154 95238 94340 0.93458 92593 91743 90909 .90090 89286 86957 92456 90703 .89000 0.87344 85734 84168 .8264581162 .79719 .75614 88900 86384 83962 0.81630 79383 .77218 .75132.73119.7117865752 2 82270 79209 0.76290 .73503 70843 68301 2 65873 .63552 57175 .82193 .78353 74726 0.71299 68058 .64993 62092 .59345 .56743 49718 79031 74622 .70496 0.66634 63017 59627 56447 .53464 50663 43233 75992 71068 66506 0.62275 58349 54703 .51316 48166 45235 37594 .73069 67684 6274 0.5820 54027 50187 4665 .4 .70259 64461 59190 0.54393 50025 46043 42410 .39092 36061 28426 .67556 61391 55839 0.50835 .46319 42241.38554.35218 .32197.24719 .64958 58468 .52679 0.47509 42888 .38753 .35049 31728 .28748 21494 62460 .55684 49697 0.44401.39711 .35554 .31863 .28584 25668 60057 53032 46884 0.41496 36770 .32618 .28966 2575 22917 .57748 .50507 .44230 0.38782 .34046 .29925 .26333 .23199 .20462 55526 5 8 2 43393 40388 32690 5 5 2 14133 12289 48102 41727 0,36245 31524 27454 23939 20900 18270

Explanation / Answer

Calculation for cash payback period

7400 *7= $51,800

Balance = 4280/7400 = .578

so total 7.6 years

Cash payback period 7.6 years Net present value $1,589

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