Description
Palo Alto Corporation is considering purchasing a new delivery truck. The truck has many advantages over the companyâ€™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 assetâ€™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 companyâ€™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 |
years |
|||
Net present value |
$ |
Dougâ€™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 |
||||
Total |
$29,680 |
$31,800 |
$38,160 |
The equipmentâ€™s salvage value is zero, and Doug uses straight-line depreciation. Doug will not accept any project with a cash payback period over 2 years. Dougâ€™s required rate of return is 12%. (Refer the below table)
Compute each projectâ€™s payback period.(Round answers to 2 decimal places, e.g. 15.25.)
AA |
years |
||
BB |
years |
||
CC |
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 long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.
Project Kilo |
Project Lima |
Project Oscar |
||||||
Capital investment |
$167,400 |
$178,200 |
$200,850 |
|||||
Annual net income: |
||||||||
Year |
1 |
14,040 |
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 |
9,180 |
13,500 |
|||||
Total |
$70,200 |
$75,060 |
$105,300 |
Depreciation is computed by the straight-line method with no salvage value. The companyâ€™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 companyâ€™s cost of capital is 6%.
Option A |
Option B |
||||
Initial cost |
$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 |
|||
Salvage value |
$0 |
$7,900 |
|||
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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