Question

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 $55,040. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,600. At the end of 8 years, the company will sell the truck for an estimated $28,900. 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 (NPV) of the proposed investment. a) Cash payback period is 6.0 years and NPV is $8,995 b) Cash payback period is 6.0 years and NPV is $9,995 c) Cash payback period is 5.4 years and NPV is $9,995 d) Cash payback period is 6.4 years and NPV is $9,995

          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 $55,040. Because of the increased capacity,
reduced maintenance costs, and increased fuel economy, the new truck is expected
to generate cost savings of $8,600. At the end of 8 years, the company will sell the
truck for an estimated $28,900. 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 (NPV) of the proposed investment.
a) Cash payback period is 6.0 years and NPV is $8,995
b) Cash payback period is 6.0 years and NPV is $9,995
c) Cash payback period is 5.4 years and NPV is $9,995
d) Cash payback period is 6.4 years and NPV is $9,995

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 55,040. Because of the increased capacity,
reduced maintenance costs, and increased fuel economy, the new truck is expected
to generate cost savings of8,600. At the end of 8 years, the company will sell the
truck for an estimated 28,900. 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 (NPV) of the proposed investment.
a) Cash payback period is 6.0 years and NPV is8,995
b) Cash payback period is 6.0 years and NPV is 9,995
c) Cash payback period is 5.4 years and NPV is9,995
d) Cash payback period is 6.4 years and NPV is 9,995

Added by Richard C.

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