Kingbird 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 $55,728. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,100. At the end of eight years, the company will sell the truck for an estimated $27,500, 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. Donald Robinson, 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 8%.
Kingbird 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 $55,728. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,100. At the end of eight years, the company will sell the truck for an estimated $27,500, 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. Donald Robinson, 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 8%.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Kingbird 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 $55,728. Because of the increased capacity, reduced
maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,100. At the end of
eight years, the company will sell the truck for an estimated $27,500. 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. Donald
Robinson, 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 8%.
(a)
Your answer is incorrect
Calculate the cash payback period and not present value of the proposed investment. If the net present value is negative,
use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round cash payback period to 2
decimal place, e.g. 12.51. For calculation purposes, use 5 decimal places as displayed in the factor table provided,
e.g. 1.25124 and not present value to 0 decimal places, e.g. 5,275.)
Click here to view the factor table.
Cash payback period
Net present value
years
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