Question

In: Accounting

Payback Period and NPV of Alternative Automobile Purchase Wendy Li decided to purchase a new Honda...

Payback Period and NPV of Alternative Automobile Purchase Wendy Li decided to purchase a new Honda Civic. Being concerned about environmental issues she is leaning toward a Honda Civic Hybrid rather than the completely gasoline-powered LX model. Nevertheless, she wants to determine if there is an economic justification for purchasing the Hybrid, which costs $3,700 more than the LX. Based on a mix of city and highway driving she predicts that the average gas mileage of each car is 40 MPG for the Hybrid and 30 MPG for the LX. Wendy also anticipates she will drive an average of 12,000 miles per year and that gasoline will cost an average of $3.10 per gallon over the next four years. She also plans to replace whichever car she purchases at the end of four years when the resale values of the Hybrid and the LX are predicted to be $12,000 and $8,500 respectively.

Required

a. Determine the payback period of the incremental investment associated with purchasing the Hybrid.

b. Determine the net present value of the incremental investment associated with purchasing the Hybrid at a ten percent time value of money. Use a negative sign with your answer, if appropriate. Round answer to the nearest whole number.

c. Determine the cost of gasoline required for a payback period of three years on the incremental investment. Round answer to two decimal places

Solutions

Expert Solution

Ans:

Incremental Cost of Hybrid $ 3,700
Average Miles per Year 12,000
LX Model Hybrid Model
Average miles per Years 12,000 12,000
Mileage 30 40
Gasoline Required 400 300
Price of Gasoline 3.1 3.1
Gasoline Expenses in a Years 1240 930
Savings in Gasoline 310.00
a)Payback Period=Initial Investment/Saving In Expenses
3700.00 ÷ -310.00
-11.94 Years
b) Net Present Value
Incremental Salvage value=12000-8500 = 3500
Years Cash Flow Cumulative DF@10% CF*DF
-3700 -3700 1 -3700
1 310 -3390 0.91 282.1
2 310 -3080 0.83 257.3
3 310 -2770 0.75 232.5
4 3810 1040 0.68 2590.8
NPV -337.3
c) Gasoline Price for 3 Years payback period
Payback period=Initial Investment /Saving in Expenses
Saving in Expenses=initial Investment /Payback period
3700 ÷ 3
1233.33
Price of Gasoline=Saving in Expenses/Saving in Gasoline in Gallon
= 1233.333333 ÷ (400-300)
= 1233.333333 ÷ 100
= 12.33

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Payback Period and NPV of a Cost Reduction Proposal—Differential Analysis Katy Zimmerman decided to purchase a...
Payback Period and NPV of a Cost Reduction Proposal—Differential Analysis Katy Zimmerman decided to purchase a new automobile. Being concerned about environmental issues, she is leaning toward the hybrid rather than the completely gasoline four-cylinder model. Nevertheless, as a new business school graduate, she wants to determine if there is an economic justification for purchasing the hybrid, which costs $1,200 more than the regular VUE. She has determined that city/highway combined gas mileage of the Green VUE and regular VUE...
5. The NPV and payback period What information does the payback period provide? Suppose you are...
5. The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years. Year Cash Flow Year 1 $275,000 Year 2 $450,000 Year 3 $425,000 Year 4 $450,000 If...
5. The NPV and payback period Part A What information does the payback period provide? Suppose...
5. The NPV and payback period Part A What information does the payback period provide? Suppose Acme Manufacturing corp CFO is evaluating a project w the following cash Inflows. She does not know the project's initial cost; however he does know that the projects regular payback period is 2.5 years. Year Cash flow 1. $350,000 2. $400,000 3. $400,000 4. $400,000 If the project's weighted average cost of capital (WACC) is 10%, what is its NPV? answer options: $326,990; $299,741;...
8. The NPV and payback period What information does the payback period provide? Suppose you are...
8. The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years. Year Cash Flow Year 1 $375,000 Year 2 $500,000 Year 3 $500,000 Year 4 $450,000 If...
7. The NPV and payback period What information does the payback period provide? Suppose you are...
7. The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years. Year Cash Flow Year 1 $325,000 Year 2 $425,000 Year 3 $500,000 Year 4 $425,000 If...
The NPV and payback period What information does the payback period provide? Suppose you are evaluating...
The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years. Year Cash Flow Year 1 $275,000 Year 2 $475,000 Year 3 $400,000 Year 4 $475,000 If the...
7. The NPV and payback period What information does the payback period provide? Suppose you are...
7. The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years. Year Cash Flow Year 1 $275,000 Year 2 $500,000 Year 3 $450,000 Year 4 $450,000 If...
7. The NPV and payback period What information does the payback period provide? Suppose ABC Telecom...
7. The NPV and payback period What information does the payback period provide? Suppose ABC Telecom Inc.’s CFO is evaluating a project with the following cash inflows. She does not know the project’s initial cost; however, she does know that the project’s regular payback period is 2.5 years. Year Cash Flow Year 1 $375,000 Year 2 $450,000 Year 3 $425,000 Year 4 $475,000 If the project’s weighted average cost of capital (WACC) is 7%, what is its NPV? $332,254 $353,019...
5. The NPV and payback period What information does the payback period provide? Suppose Omni Consumer...
5. The NPV and payback period What information does the payback period provide? Suppose Omni Consumer Products’s CFO is evaluating a project with the following cash inflows. She does not know the project’s initial cost; however, she does know that the project’s regular payback period is 2.5 years. Year Cash Flow Year 1 $350,000 Year 2 $500,000 Year 3 $500,000 Year 4 $450,000 If the project’s weighted average cost of capital (WACC) is 7%, what is its NPV? $415,274 $394,510...
7. The NPV and payback period What information does the payback period provide? Suppose Omni Consumer...
7. The NPV and payback period What information does the payback period provide? Suppose Omni Consumer Products’s CFO is evaluating a project with the following cash inflows. She does not know the project’s initial cost; however, she does know that the project’s regular payback period is 2.5 years. Year Cash Flow Year 1 $275,000 Year 2 $450,000 Year 3 $475,000 Year 4 $400,000 If the project’s weighted average cost of capital (WACC) is 8%, what is its NPV? $331,563 $349,014...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT