Question

Finch Delivery is a small company that transports business packages between New York and Chicago. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. Finch Delivery recently acquired approximately $6.2 million of cash capital from its owners, and its president, George Hay, is trying to identify the most profitable way to invest these funds. Todd Payne, the company's operations manager, believes that the money should be used to expand the fleet of city vans at a cost of $740,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by $350,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $102,000. Operating the vans will require additional working capital of $31,000, which will be recovered at the end of the fourth 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 $ 158,000 Year 2 $320,000 Year 3 $391,000 Year 4 $438,000 The large trucks are expected to cost $820,000 and to have a four-year useful life and a $86,000 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to $19,000. Finch Delivery's management has established a 10 percent desired rate of return. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a.&b. Determine the net present value and present value index for each investment alternative. (Round your intermediate calculations and final answers to 2 decimal places. Enter your answer in whole dollars and not in millions.) Answer is complete but not entirely correct. a. Net Present Value (NPV) Present Value Index (PVI) Purchase of Purchase of City Vans Trucks $ 429,304.00 Ⓡ$ 161,998.10 X 1.56 1.19 X

Answer 1

Finch delivery vans . . Cash Cash outflow - 740000 oughout 31000 (operating cost) 771000 . Carte Inglow 1-4 Income - PUAR (10%) 350,000 3.1699 102000 (Salvape) 0.6830 31000 (operating) 0.6830 cost I Discounted Casa flow 11094615 69666 21173 1200304 NPV = Cash Inglow - Cash outflow 1200304 - 771000 = Pri= Cash Ingrow = 1200304 = 1.556 771000 Can How Scanned with CamScanner

Trucks Cash $ 20000 oufflow - 19000 (Training cost) 839000 Cash Inglow Disc Cash flan 143637.8 264448 293758.3 PN (10%) 09091 0.8264 0.7513 0.6830 0.6830 Income 158000 320 000 391000 4.38000 86000 (salvage) rm JJ 299154 • 58738 1059736-1 NPV = 1059736.1 - 839000 = 161,998.1 pul = 1059736-1 1.26 30 839000 Scanned with CamScanner
i have earlier missed some parts in truck case, but the van answer is perfectly correct.we can check that also coz if we reverse follow pvi , we will get the same npv. it is not possible that npv is wrong and profitability index is wrong.kindly check that i am sure there is some misunderstanding