Palo Alto Corporation is considering purchasing a new delivery truck. The truck
ID: 2497647 • 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 $56,970. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,630. At the end of 8 years the company will sell the truck for an estimated $27,770. 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%.
(Refer the below table).
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. Round Discount Factor to 5 decimal places, e.g. 0.17986.)
Cash Payback period ________________ years
Net present value $________________
Explanation / Answer
Payback Period=the last period with negative cash flow+The absolute value of cumulative cash flow at the end of period A/Total cash flow during tehe period A Year Cash Flow Cumulative cash Flow 0 -56970 -56970 1 7630.00 -49340.00 2 7630.00 -41710.00 3 7630.00 -34080.00 4 7630.00 -26450.00 5 7630.00 -18820.00 6 7630.00 -11190.00 7 7630.00 -3560.00 8 35400.00 31840.00 Payback period is between 2 and 3 7.1 Payback 7.1 years Life of project ................... 8 years NPV = {Net Period Cash Flow/(1+R)^T} - Initial Investment USD$ Year Cah Flow Discount @8% Discounted Amount 0 -56970 1 -56970 1 7630 0.9259 7064.62 2 7630 0.8573 6541.20 3 7630 0.7938 6056.69 4 7630 0.735 5608.05 5 7630 0.6806 5192.98 6 7630 0.6302 4808.43 7 7630 0.5835 4452.11 8 35400.00 0.5403 19126.62 NPV 1880.69
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