Linkin Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company’s curr
Posted: Mon May 30, 2022 7:40 am
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 $55,440. Because of the increased capacity, reduced
maintenance costs, and increased fuel economy, the new truck is
expected to generate cost savings of $7,700. At the end of 8 years,
the company will sell the truck for an estimated $27,500.
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%.
(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.)
(b) Does the project meet the company’s cash payback
criteria?
Does it meet the net present value criteria for acceptance?
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 $55,440. Because of the increased capacity, reduced
maintenance costs, and increased fuel economy, the new truck is
expected to generate cost savings of $7,700. At the end of 8 years,
the company will sell the truck for an estimated $27,500.
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%.
(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.)
(b) Does the project meet the company’s cash payback
criteria?
Does it meet the net present value criteria for acceptance?