Question 1 Open Show Work Question 1 Linkin Corporation is considering purchasin
ID: 2587503 • Letter: Q
Question
Question 1
Open Show Work
Question 1
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%.Click here to view PV table.
(a)
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. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Cash payback period years Net present value $
(b)
Does the project meet the company’s cash payback criteria?
NoYes
Does it meet the net present value criteria for acceptance?
YesNo
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Explanation / Answer
Nominal Payback
Year
Headings
Cash Flow
Discount Rate @ 8%
Discounted Cash flows
Discounted Cumulative Cash flows
0
Initial Investment
-56800
1.0000
-56800.00
-56800.00
1
Annual Savings
8300
0.9259
7685.19
-49114.81
2
Annual Savings
8300
0.8573
7115.91
-41998.90
3
Annual Savings
8300
0.7938
6588.81
-35410.10
4
Annual Savings
8300
0.7350
6100.75
-29309.35
5
Annual Savings
8300
0.6806
5648.84
-23660.51
6
Annual Savings
8300
0.6302
5230.41
-18430.10
7
Annual Savings
8300
0.5835
4842.97
-13587.13
8
Annual Savings
8300
0.5403
4484.23
5592.42
8
Salvage Value
27200
0.5403
14695.31
NPV
5592.42
Discounted Payback
=7 + (13587.13/19179.55)
7.7084
Year
(a) Cash payback period = 7.71 Years
(Discounted)
NPV = $ 5592.42
(b) 1. No. Company does not meet the company’s payback criteria of payback of less than 50% life of asset i.e. less than 4 years (50% of 8 years life of truck) in this case.
(b) 2. Yes. Company’s net present value criteria does meet hence it could be accepted.
Nominal Payback
Year
Headings
Cash Flow
Discount Rate @ 8%
Discounted Cash flows
Discounted Cumulative Cash flows
0
Initial Investment
-56800
1.0000
-56800.00
-56800.00
1
Annual Savings
8300
0.9259
7685.19
-49114.81
2
Annual Savings
8300
0.8573
7115.91
-41998.90
3
Annual Savings
8300
0.7938
6588.81
-35410.10
4
Annual Savings
8300
0.7350
6100.75
-29309.35
5
Annual Savings
8300
0.6806
5648.84
-23660.51
6
Annual Savings
8300
0.6302
5230.41
-18430.10
7
Annual Savings
8300
0.5835
4842.97
-13587.13
8
Annual Savings
8300
0.5403
4484.23
5592.42
8
Salvage Value
27200
0.5403
14695.31
NPV
5592.42
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