Palo Alto Corporation is considering purchasing a new delivery truck. The truck
ID: 2422885 • 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 $57,130. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,580. At the end of 8 years the company will sell the truck for an estimated $27,850. 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 the factor table. (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 years Net present value $
Exercise 24-2 Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,230. Each project will last for 3 years and produce the following net annual cash flows. Year AA BB CC 1 $9,477 $12,344 $15,327 2 12,168 12,344 11,817 3 17,667 12,344 12,987 Total $39,312 $37,032 $40,131 The equipment’s salvage value is zero, and Doug uses straight-line depreciation. Doug will not accept any project with a cash payback period over 2 years. Doug’s required rate of return is 12%. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Compute each project’s payback period. (Round answers to 2 decimal places, e.g. 15.25.) AA years BB years CC years Which is the most desirable project? The most desirable project based on payback period is Project AAProject BBProject CC Which is the least desirable project? The least desirable project based on payback period is Project BBProject AAProject CC Link to Text Compute the net present value of each project. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answers to the nearest whole dollar, e.g. 5,275.) AA BB CC Which is the most desirable project based on net present value? The most desirable project based on net present value is Project CCProject BBProject AA. Which is the least desirable project based on net present value? The least desirable project based on net present value is Project BBProject CCProject AA.
Exercise 24-4 BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided below. Machine A Machine B Original cost $78,420 $180,700 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $20,360 $40,250 Estimated annual cash outflows $4,940 $10,200 Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. (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 and profitability index to 2 decimal places, e.g. 10.50.) Machine A Machine B Net present value Profitability index Which machine should be purchased? Machine AMachine B should be purchased.
Explanation / Answer
Answer : Palo alto corporatio
Cash payback period = Initial cost outflow/Annual Income from such project
= 57130/7580
= 7.5 years
NPV = 7580 x PVAF8/0.08 + 27850 x PVF8/0.08 - 57130
= 7580 x 5.745 + 27850 x 0.540 - 57130
= $1456.10
Answer: Doug's custom construction copmany
Project AA
Payback period = 2 + (22230 - 21821)/17667
= 2.02 years
NPV = 9447 x 0.893 + 12168 x 0.797 + 17667 x 0.712 - 22230
= 8483.97
Project BB
Payback period = 1 + (22230 - 12344)/12344
= 1.8 years
NPV = 12344 x 2.402 - 22230
= 7420.28
Project CC
Payback period = 1 + (22230 - 15327)/11817
= 1.5 years
NPV = 15327 x 0.893 + 11817 x 0.797 + 12987 x 0.712 - 22230
= 10121.90
Prject CC should be choosen
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