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Palo Alto Corp

Price: $1.99


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 $56,000. Because of the increased capacity, reduced
maintenance costs, and increased fuel economy, the new truck is expected to generate cost
savings of $7,500. At the end of 8 years the company will sell the truck for an estimated

$27,000. 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%.

Instructions
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
negative -45 or parentheses eg (45). Round computations and final 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 computations for Discount Factor to 5 decimal places.)

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