Exercise 26-1 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 $55,400. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,500. 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 896. 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 O 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) Cash payback period Net present value s Does the project meet the company's cash payback criteria? Does it meet the net present value criteria for acceptance? Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,880. Each project will last for 3 years and produce the following net annual cash flows. YearAA 1 $7,280 $10,400 $13,520 2 9,360 10,400 12,480 3 12,480 10,400 11,440 Total $29,120 $31,200 $37,440 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 I rate of return is 12%. getheretoyiewPytable. Compute each project's payback period. (Round answers to 2 decmal places, e.g. 1s.25.) 2.5 years 2.2 years 1.75 years Which is the most desirable project? The most desirable project based on payback period is Project CC Which is the least desirable projecti? The least desirable project based on payback period is Compute the net present value of each project. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g.(45) Round final answers to the nearest whole dollar, e-g. 5,275. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Cc Which is the most desirable project based on net present value? The most desirable project based on net present value is Which is the least desirable project based on net present value? The least desirable project based on net present value is
