Question

capital of $40,000, which will be recovered at the end of the four year. In contrast, Oscar Vance, the company's chief accountant, believes that the funds should be used to purchase large trucks to deliver the packages between the depots in the two cities. The conversion process would produce continuing improvement in operating savings and reduce cash outflows as follows: Year 1 $169,000 Year 2 $316,000 Year 3 $395,000 Year 4 $435,000 The large trucks are expected to cost $870,000 and to have a four-year useful life and a $89.000 salvage value. In addition to the purchase price of the trucks, up front training costs are expected to amount to $13,000. Solomon Delivery's management has established a 12 percent desired rate of return. PV of $1 and PVA of S1) (Use appropriate factor(s) from the tables provided.) Required a.&b. Determine the net present value and present value Index for each Investment alternative. (Enter answers in whole dollar, not in million. Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answers to 2 decimal places.) Answer is complete but not entirely correct. Purchase of Purchase of City Vans Net Present Value 1 070 07 ® Prasant Value Index. ®

Answer 1

Alternative A - Purchase of City Vans
Purchase Cost = $790000
Investment = $790000+$48000 = $838000
NPV = Annual Cash Flows x PV annuity + PV of Salvage Value + PV of Working Capital Recovered - Investment
PV annuity for 4 years @12% = 3.037349, PV factor @12 % in 4th year = 0.635518

NPV = $340000 x 3.037349 + $106000 x 0.635518 + $48000 x 0.635518 - $838000
= $292568.43

Present Value Index = PV / Investment
= $1130568.43 / $838000 = 1.3491

Alternative B - Purchase of Large Trucks
Purchase Cost = $870000
Investment = $870000+$13000 = $883000
NPV = Annual Cash Flows x PV annuity + PV of Salvage Value + PV of Working Capital Recovered - Investment

Year	Annual Cash Flows	PV Factor @12%	PV
1	$               169,000.00	0.892857	$            150,892.83
2	$               316,000.00	0.797194	$            251,913.30
3	$               395,000.00	0.71178	$            281,153.10
4	$               524,000.00	0.635518	$            333,011.43
		Total PV	$        1,016,970.67
		Investment	$            883,000.00
		NPV	$            133,970.67

Cash flows for Year 4 includes Salvage Value of $89000

Present Value Index = PV / Investment
= $1016970.67 / $883000 = 1.1517