Question

Exercise 26-1 Linkin Corporation is considering purchasing a new delivery truck. There 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 38,300. At the end of years the company will sell the truck for an estimated $27,900. 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 ass estimated 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 capitalis Ook here to view PV table Compute the cash payback period and net present value of the proposed investment fir the net present value is negative use either a negative sign preceding the number eg -45 or parentheses (45). Round answer for present was to decimal places, s. 125. Round answer for Payback period to I decimal place de 10.5. For calculation purposes, use 5 decimal places as displayed in the factor table provided) Cash payback period years Net present value Does the project meet the company's cash payback criteria? Does it meet the net present value criteria for acceptance?

Answer 1

a.

Cash payback period = Initial investment / annual cash flow

Cash payback period = $56,000 / $8,300 = 6.7 Years

Net present value = Present value of cash inflow - Present value of cash outflow

Net present value = [$8,300*5.747 (PVF@8%, 1-8 years) + $27,900*0.540 (PVF@8%, 8th year) ] - $56,000

Net present value = ($47,700+15,066) - 56,000 = $6,766

b.

No, the project did not meet the company's payback criteria.

Yes, the project meets the net present value criteria for acceptance.