Need help with these. Palo Alto Corporation is considering purchasing a new deli

Question

Need help with these.

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 $56,490. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,430. At the end of 8 years the company will sell the truck for an estimated $27,740. 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%. (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 placese.g. 125. Round answer for Payback period to 1 decimal place, e.g. 10.5.) Using the discounted cash flow technique, compute the net present value. (If the net present value is negative> use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answer for present value to 0 decimal placese.g. 125.)

Explanation / Answer

Using the discounted cash flow technique, compute the NPV:

We are taking ideal figures as there is no information in the question regarding cash flows. Let us frame the question first with 10% discount rate and using the following cash flows. Assume cash flows are made at the beginning of the year.

Year

Cash flows

1

$          (45,000)

2

$            12,000

3

$            15,000

4

$            18,000

5

$            20,000

Based on the above information the answer would be as follows:

Year

Cash flows

Discount
factor 10%

Discounted
cash flows

1

$ (45,000)

1

$ (45,000.00)

2

$12,000

0.9091

$   10,909.20

3

$15,000

0.8264

$   12,396.00

4

$18,000

0.7513

$   13,523.40

5

$ 20,000

0.683

$   13,660.00

NPV

$      5,488.60

Therefore, the NPV is $5,488.60.

Year

Cash flows

1

$          (45,000)

2

$            12,000

3

$            15,000

4

$            18,000

5

$            20,000

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