Sheridan 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 $55,695. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,900. 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. James Johnson, 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 partially correct. Calculate 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 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 net present value to 0 decimal places, eg. 5,275.) Click here to view the factor table. Cash payback period Net present value $ 7.05 years
Sheridan 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 $55,695. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,900. 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. James Johnson, 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 partially correct. Calculate 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 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 net present value to 0 decimal places, eg. 5,275.) Click here to view the factor table. Cash payback period Net present value $ 7.05 years
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
Related questions
Question
Don't give answer in image
Transcribed Image Text:Sheridan 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 $55,695. Because of the increased capacity, reduced
maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,900. 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. James Johnson, 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 partially correct.
Calculate 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 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 net present value to O decimal places,
eg. 5,275.)
Click here to view the factor table.
Cash payback period
Net present value
$
7.05
years.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education