Question

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 $ 55,040. Because of the increased capacity, reduced
maintenance costs, and increased fuel economy, the new truck is
expected to generate cost savings of $ 8,600. At the end of 8
years, the company will sell the truck for an estimated $ 28,900.
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 PV table.

**(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.)**

Cash payback period | Enter a number of years rounded to 1 decimal place years | |||
---|---|---|---|---|

Net present value | $ | enter a dollar amount rounded to 0 decimal places |

**(b)**

Does the project meet the company’s cash payback
criteria?

select an optionselect an option YesNo |

Does it meet the net present value criteria for
acceptance?

select an optionselect an option YesNo |

Answer #1

a | ||||

Cash payback period = Investment cost/Annual cost savings | ||||

Cash payback period = 55040/8600=
6.4 years |
||||

Present value of annual cost savings | 49421 | =8600*5.74664 | ||

Present value of salvage value | 15614 | =28900*0.54027 | ||

Less: Investment cost | -55040 | |||

Net present value |
9995 |
|||

b | ||||

No, the
project does not meet the company’s cash payback criteria as its
cash payback period is more than 50% |
||||

Yes, the
project meets the net present value criteria as Net present value
is positive |
||||

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Exercise 12-1 (Video)
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truck (not the least of which is that it runs). The new truck would
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expected to generate cost savings of $8,300. At the end of 8 years,
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Traditionally the company has...

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truck. The truck has many advantages over the company’s current
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maintenance costs, and increased fuel economy, the new truck is
expected to generate cost savings of $8,600. At the end of 8 years,
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Traditionally the company has used a rule...

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Traditionally the company has used a rule...

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Estimates for each machine are as follows:
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A
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Estimated life
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Estimated annual cash
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