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

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 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		[removed]years
Project Lima		[removed]years
Project Oscar		[removed]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		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		$[removed]		[removed]		[removed]%
Option B		$[removed]		[removed]		[removed]%