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 $55,950. Because of the

increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate

cost savings of $8,560. At the end of 8 years the company will sell the truck for an estimated $27,610. 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%.

(Refer the below 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 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. Round Discount Factor to 5 decimal

places, e.g. 0.17986.)

Cash payback period

Net present value

years

$

Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of

$23,320. Each project will last for 3 years and produce the following net annual cash flows.

Year

AA

BB

CC

1

$7,420

$10,600

$13,780

2

9,540

10,600

12,720

3

12,720

10,600

11,660

$29,680

$31,800

$38,160

Total

The equipment’s salvage value is zero, and Doug uses straightline depreciation. Doug will not accept any project

with a cash payback period over 2 years. Doug’s required rate of return is 12%. (Refer the below table)

Compute each project’s payback period. (Round answers to 2 decimal places, e.g. 15.25.)

AA

years

BB

years

C

C

years

Which is the most desirable project?

The most desirable project based on payback period is

Which is the least desirable project?

The least desirable project based on payback period is

Henkel Company is considering three longterm capital investment proposals. Each investment has a useful life of 5

years. Relevant data on each project are as follows.

P

r

oj

e

Proje

ct Project Oscar

Lima

ct

K

il

o

Capital

investme

nt

$167,400

Annual net income:

$178,200

$200,85

0

Year 1

18,900

29,700

2

14,040

17,820

24,300

3

14,040

16,740

23,220

4

14,040

12,420

14,580

5

14,040

14,040

9,180

13,500

$70,200

$75,060

Total

$105,300

Depreciation is computed by the straightline method with no salvage value. The company’s cost of capital is 15%.

(Assume that cash flows occur evenly throughout the year.) (Refer the below table)

Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.)

Project Kilo

years

Project Lima

years

Project Oscar

years

Goltra Clinic is considering investing in new heart-monitoring equipment. It has two options:

Option A would have an initial lower cost but would require a significant expenditure for

rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance

costs would be higher. Since the Option B machine is of initial higher quality, it is expected to

have a salvage value at the end of its useful life. The following estimates were made of the cash

flows. The company’s cost of capital is 6%.

Option A

Initial cost

Option B

$191,000

$263,000

Annual cash inflows

$72,000

$81,800

Annual cash outflows

$28,100

$26,700

Cost to rebuild (end of year 4)

$51,100

$0

$0

$7,900

Salvage value

Estimated useful life

7 years

7 years

Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each

option. (Hint: To solve for internal rate of return, experiment with alternative discount rates to

arrive at a net present value of zero.) (If the net present value is negative, use either a negative

sign preceding the number eg -45 or parentheses eg (45). Round answers for present value to

0 decimal places, e.g. 125. Round profitability index to 2 decimal places, e.g. 10.50. Round

answers for IRR to 0 decimal places, e.g. 12. Round Discount Factor to 5 decimal places.)

Net Present Value

Profitability Index

Internal Rate of Return

Option A

$

%

Option B

$

%

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