ACC – Managerial Accounting Problems – Assignment Online  assignmentsonline.org
Business Finance Assignment Online  assignmentsonline.org
ACC – Managerial Accounting Problems Assignment Online  assignmentsonline.org
Accounting – Assignment Online  assignmentsonline.org
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 longterm 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 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 
[removed]years 

Project Lima 
[removed]years 

Project Oscar 
[removed]years 
Goltra Clinic is considering investing in new heartmonitoring 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]% 
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