View the step-by-step solution to:

Palo Alto Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least...

1. 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 $56,610. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,700. At the end of 8 years the company will sell the truck for an estimated $27,670. 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%.

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.)

A. Cash Payback Period in years

B. Net Present Value $

2. Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $28,380. Each project will last for 3 years and produce the following net annual cash flows.

Year AA BB CC
1 $9,030   $12,900   $16,770  
2 11,610   12,900   15,480  
3 15,480   12,900   14,190  
Total $36,120   $38,700   $46,440




The equipment’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. Doug’s required rate of return is 12%.
A. Compute each project’s payback period. (Round answers to 2 decimal places, e.g. 15.25.)

AA years
BB years
CC

years

3. Hiland Inc. manufactures snowsuits. Hiland is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Hiland spent $55,000 to keep it operational. The existing sewing machine can be sold today for $244,020. The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts for years 1 to 7:


Year 1 $390,100
2 399,200
3 410,300
4 425,900
5 432,800
6 435,100
7 437,300




The new sewing machine would be depreciated according to the declining-balance method at a rate of 20%. The salvage value is expected to be $380,200. This new equipment would require maintenance costs of $99,800 at the end of the fifth year. The cost of capital is 9%.

a. Calculate the net present value.

4.BAK 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.

                         Machine A          Machine B

Original Cost $77,780 $183,200

Estimated Life 8 years 8 years

Salvage Value 0             0

Estimated annual cash inflows $19,510 $39,740

Estimated annual cash outflows $4,870 $9,940

a. Calculate the net present value and profitability index of each machine. Assume a 9% discount rate.

Machine A Machine B
Net present value
Profitability index


5. Eisler Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for $447,400. The company believes that with this new machine it will improve productivity and increase quality, resulting in an increase in net annual cash flows of $102,726 for the next 6 years. Management requires a 10% rate of return on all new investments.

a. Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 10.)

Internal rate of return

%

Top Answer

1 a) New Truck Cost = $56,730 Cost savings = $8,590 Life of the Truck is 8 years Cost of Capital = 8% (Discount rate) Salvage... View the full answer

Sign up to view the full answer

Other Answers

Hello student, I can handle your question though it requires a lot of work for you to get the... View the full answer

1 comment
  • Please mark as unhelpful. Thanks.
    • ka_moderator
    • Jul 20, 2016 at 1:54pm

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask a homework question - tutors are online