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Vaughn Corporation is considering purchasing a new delivery truck. The truckhas many advantages over the company's current truck (not the least of which is that
Vaughn Corporation is considering purchasing a new delivery truck. The truckhas many advantages over the company's current truck (not the least of which is that it runs). The new truck would cost $56,072. Because of the increased capacity, reduced maintenance costs, and increased fucl economy, the new truck is expected to generate cest savings of $8,600. At the end of eight years, the company will sell the truck for an estimated $27,900. Traditionally, the company has used a general rule that it should not accept a proposal unless it has a payback period that is less than 50% of the asset's estimated useful life. Joseph Taylor, a new manager, has suggested that the company should not rely only on the payback approach but should also use the net present value method when evaluating new projects. The company's cost of capital is B%. Shamrock Company is considering two different, mutually exclusive capital expenditure proposals, Project A will cost $485,000, has an expected useful life of 12 years and a salvage value of zero, and is expected to increase net annual cash flows by $75.000. Project B will cost $272,000, has an expected useful life of 12 years and a salvage value of zero, and is expected to increase net annual cash flows by $45,000. Adiscount rate of 9% is appropriate for both projects
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