Linkin Corporation is considering purchasing a new dellvery truck. The truck has

Question

Linkin Corporation is considering purchasing a new dellvery 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 $56,000. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,000. At the end of 8 years the company will sell the truck for an estimated $27,000. 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 vlew PV table Compute the cash payback period and net present value o the proposed investment (If the net present value is nega ve, use either a negative sign preceding the number eg 45 or aren heses 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. For calculation purposes, use 5 declmal places as displayed in the factor table provided.) Cash payback period Net present value

Explanation / Answer

Cash payback = 56000/8000 = 7 years Present value of annual cash flows 45973 =8000*5.74664 Present value of salvage value 14587 =27000*0.54027 Total Present value 60560 Less: Initial investment 56000 Net present value 4560

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