**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.)

## No comments:

## Post a Comment