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1. Linkin Corporation is considering purchasing a new delivery truck. The truck has many...

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1. Linkin 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 $8,000 yearly. 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%.

(a) 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. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

What is the Cash payback period in years?

What is the Net present value in dollars?

NPV and Payback Period

Net Present Value and Payback Period are measures used by companies to evaluate different investment options. Depending on the interpretation of these metrics, decisions are made to invest in projects with highest returns

Answer and Explanation: 1

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In order to calculate the Net Present Value you would take the 8% Cost of capital and use this to calculate the NPV for the cash flow of the truck....

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How to Calculate Net Present Value: Definition, Formula & Analysis

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Chapter 5 / Lesson 20
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Learn about what net present value is, how it is calculated both for a lump sum and for a stream of income over multiple years. View some examples on NPV.


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