Question

Grouper 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 $53.040. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7.800. At the end 8 years, the company will sell the truck for an estimated $29,500. 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. Compute the cash payback period and net present value of the proposed investment. (If the net present value is negative, use either a negative sin preceding the number ...450 parentheses e.. (45). Round answer for present value to O decimal places, eg. 125. Round answer for Payback period to 1 decimal place, e3. 10.5. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Cash payback period years Net present value $ (b) Does the project meet the company's cash payback criteria? Does it meet the net present value criteria for acceptance?

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Answer 1

a	Calculation of cash Payback period as shown below
	Cash payback period =	Cost of investment/Net annual cash flows
		$53040/$7800
		6.8 years
	Calculation of net present value of the project:
	Particular	cash flow (a)	Year	PV factor @ 8% (b)	Pv of cash flows (a*b)
	Cost saving	$7800	1 to 8	5.7466	$44823
	Salvage Value	$29500	8	0.5403	$15939
	Cost of investment	($53040)	0	1	($53040)
				NPV	$7722
b	The project should not be accepted on the basis of cash payback period. Because the payback period 6.8 years is more than companys
	Criteria of 4 years (50% of life of machine)
c	Yes, because NPV is positive so project meets NPV criteria