I have having trouble with this problem. Can anyone help me? I have included the

Question

I have having trouble with this problem. Can anyone help me? I have included the reference tables that we are required to use. FYI, I am using the textbook: Kimmel, Accounting: Tools for Decision Making, 5e. This is problem from Chapter 24 Planning Capital Investments. It is Exercise 24-1.

Exercise 24-1 (part level submission) Palo Alto 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 $56,250. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,320. At the end of 8 years the company will sell the truck for an estimated $27,860. 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% view the factor table (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) (a) Your answer is incorrect. Try again. 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 0 decimal places, e.g. 125. Round answer for Payback period to 1 decimal place, e.g. 10.5.) Cash payback period years Net present value 5032

Explanation / Answer

a) Cash payback period

= Initial Investment for the project/ Annual cash Inflow

= 56250/8320

=6.76 years

So, 6.76 years it will take to recover its investments. As pre cash payback method.

b) Net Present value

Particulars                                       Year            Present Value   Present Value Factor@8%        Amounts                

A)Cash Inflow                                    1-8               8320                       5.74664                               47812.0

B)Salvage Value                                  8                 27860                     .54027                              15051.9

C)Investments                                     0                  56250                          1                                     (56250)

D)Net Present Value                                                                                                                           6613.9

Since the Net present value is positive 6613.9. So, project is acceptable

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