Allen 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 $48,000. Because of the increased capacity, reduced
maintenance costs, and increased fuel economy, the new truck is expected to generate
cost savings of $8,000. At the end of 8 years the company will sell the truck for an esti-
mated $20,000. 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 70% of the asset’s esti-
mated useful life. Achin Ceban, 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 9%.
(a) Compute the cash payback period and net present value of the proposed investment.
(b) Does the project meet the company’s cash payback criteria? Does it meet the net
present value criteria for acceptance? Discuss your results.
Kogama Manufacturing Company is considering three new projects, each
requiring an equipment investment of $25,000. Each project will last for 3 years and pro-
duce the following cash inflows.
The equipment’s salvage value is zero. Kogama uses straight-line depreciation. Kogama
will not accept any project with a payback period over 2.5 years. Kogama’s minimum
required rate of return is 12%.
(a) Compute each project’s payback period, indicating the most desirable project and the
least desirable project using this method. (Round to two decimals.)
(b) Compute the net present value of each project. Does your evaluation change? (Round
to nearest dollar.)
SWC Corp. is considering purchasing one of two new diagnostic machines.
Either machine would make it possible for the company to bid on jobs that it currently
isn’t equipped to do. Estimates regarding each machine are provided below.