Palo Alto Corporation is considering purchasing a new delivery truck. The truck
ID: 2473306 • 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 $56,050. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,090. At the end of 8 years the company will sell the truck for an estimated $27,780. 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.)
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(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Kimmel tables - Word ? FILE HOME INSERT DESIGN PAGE LAYOUT REFERENCES MAILINGS REVIEWVIEW Chris Yun Cut Copy Find c Replace Select nd Times New R 9 A A Aa AaBbCcDd AaBbCcDdl Aa AaBbCcD AaBbCcDdEe Paste NormalNo Spac. Heading 1 Heading 2 Title Subtitle Subtle Em Format Painter Clipboard Font Paragraph Editing TABLE JFuture Value of Periods 400 .00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.04000 1.05000 1.06000 1.07000 1.08000 1.09000 1.10000 1.11000 .12000 1.15000 1.08160 1.10250 1.12360 1.14490 1.16640 1.18810 1.21000 1.23210 1.25440 1.32250 1.12486 1.15763 1.19102 1.22504 1.25971 1.29503 1.33100 1.36763 1.40493 1.52088 .16986 1.21551 1.26248 131080 1.36049 1.41158 1.46410 1.51807 1.57352 1.74901 1.21665 1.27628 1.33823 1.40255 1.46933 153862 1.61051 1.68506 1.76234 2.01136 1.26532 1.34010 1.41852 1.50073 1.58687 1.67710 1.77156 1.87041 .97382 2.31306 1.31593 1.40710 1.50363 1.60578 1.71382 1.82804 1.94872 2.07616 2.21068 2.66002 1.36857 1.47746 1.59385 171819 1.85093 1.99256 2.14359 2.30454 2.47596 3.05902 1.42331 1.55133 1.68948 1.83846 1.99900 2.171892.35795 2.55803 2.77308 3.51788 1.48024 1.62889 1.79085 1.967152.15892 2.36736 2.59374 2.83942 3.10585 4.04556 1.53945 171034 1.89830 2.10485 2.33164 2.58043 2.85312 3.15176 3.47855 4.65239 1.60103 1.79586 2.01220 2.25219 2.51817 2.81267 3.13843 3.49845 3.89598 5.35025 1.665071.88565 2.13293 2.40985 2.71962 3.0658 3.45227 3.88328 4.36349 6.15279 1.73168 1.97993 2.26090 2.57853 2.93719 3.34173 3.79750 4.31044 4.88711 7.07571 1.80094 2.07893 2.39656 2.75903 3.17217 3.64248 4.17725 4.78459 5.47357 8.13706 6% 7% 890 9% 10% 11% 12% 1500 4 10 12 13 14 15 16 17 18 19 1.87298 2.18287 2.54035 2.95216 3.42594 3.97031 4.59497 5.31089 6.13039 9.35762 1.94790 2.29202 2.69277 3.15882 3.70002 4.32763 5.05447 5.89509 6.86604 10.76126 2.02582 2.40662 2.85434 3.37993 3.99602 4.71712 5.55992 6.54355 7.68997 12.37545 2.10685 2.52695 3.02560 3.61653 4.31570 5.14166 6.115917.26334 8.61276 14.23177 2.19112 2.65330 3.207143.86968 4.66096 5.60441 6.72750 8.06231 9.64629 16.36654 PAGE 1 OF 7 969 WORDS ENGLISH (UNITED STATES) + 95% 3:30 PM 4/23/2016 Search the web and Windows ENGExplanation / Answer
Cash pay back period = 56050 / 8090 = 6.93 years with useful life of 8 years
NPV = [8090 * PVIFA(8%,8) + 27780 * PVIF(8%,8) ] - 56050
= [8090 * 5.74664 + 27780 * 0.54027 ] - 56050
= 61499 - 56050 = $5449
No, the project does not meet the company’s cash payback criteria.
Yes, it does meet the net present value criteria for acceptance. Thus should be accepted.
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