Question

Campbell 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. Campbell Delivery recently acquired approximately $6.7 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 $800,000. 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 $260,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $107.000. Operating the vans will require additional working capital of $41,000, 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 $154,000 Year 2 $326,000 Year 3 $406,000 Year 4 $442,000 The large trucks are expected to cost $880,000 and to have a four-year useful life and a $81,000 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to $18,000. Campbell Delivery's management has established a 8 percent desired rate of return. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Darural Prev 1 of 6 ! Score answer > 728 WAO W ?X90 MacBook Air

Answer 1

Purchase of City Vans

Initial cost of purchasing vans = $800,000

Additional Working Capital required = $41,000

Salvage Value of vans after 4 years = $107,000

Annual increase in cash inflow = $260,000

PV of Cash Outflows = Initial cost of purchasing + Working capital requirement

= $800,000 + $41,000

= $841,000

PV of cash Inflow = PV of annual increase in cash flow + PV of salvage value + PV of Working capital released

= ($260,000 * 3.312) + ($107,000 * 0.735) + ($41,000 * 0.735)

= $861,120 + $78,645 + $30,135

= $969,900

Net Present Value = PV of Cash Inflow - PV of cash outflow

= $969,900 - $841,000

= $128,900

Present Value Index = PV of Cash Inflow / PV of cash outflow

= $969,900 / $841,000

= 1.15

Purchase of Trucks

Initial cost of purchasing trucks = $880,000

Salvage Value of vans after 4 years = $81,000

Upfront training cost = $18,000

Cash Inflows

Year 1 = $154,000

Year 2 = $326,000

Year 3 = $406,000

Year 4 = $442,000

PV of Cash Outflows = Initial cost of purchasing + Upfront training cost

= $880,000 + $18,000

= $898,000

PV of cash Inflow = PV of annual cash flows + PV of salvage value

= ($154,000 * 0.926) + ($326,000 * 0.857) + ($406,000 * 0.794)+ ($442,000 * 0.735) + ($81,000 * 0.735)

= $142,604 + $279,382 + $322,364 + $324,870 + $59,535

= $1,128,755

Net Present Value = PV of Cash Inflow - PV of cash outflow

= $1,128,755 - $898,000

= $230,755

Present Value Index = PV of Cash Inflow / PV of cash outflow

= $1,128,755 / $898,000

= 1.257