Solution a & b:
Computation of NPV - Investment in VAN (Alternative 1) | ||||
Particulars | Period | PV Factor | Amount | Present Value |
Cash outflows: | ||||
Cost of VAN | 0 | 1 | $800,000.00 | $800,000.00 |
Working capital | 0 | 1 | $32,000.00 | $32,000.00 |
Present Value of Cash outflows (A) | $832,000.00 | |||
Cash Inflows | ||||
Annual increase in Cash Inflows: | ||||
Year 1 | 1 | 0.909091 | $340,000.00 | $309,090.94 |
Year 2 | 2 | 0.826446 | $340,000.00 | $280,991.64 |
Year 3 | 3 | 0.751315 | $340,000.00 | $255,447.10 |
Year 4 | 4 | 0.683013 | $340,000.00 | $232,224.42 |
Salvage Value | 4 | 0.683013 | $102,000.00 | $69,667.33 |
Recovery of Working capital | 4 | 0.683013 | $32,000.00 | $21,856.42 |
Present Value of Cash Inflows (B) | $1,169,277.84 | |||
Net Present Value (NPV) (B-A) | $337,277.84 |
Computation of NPV - Investment in Truck (Alternative 2) | ||||
Particulars | Period | PV Factor | Amount | Present Value |
Cash outflows: | ||||
Cost of Truck | 0 | 1 | $880,000.00 | $880,000.00 |
Upfront training cost | 0 | 1 | $19,000.00 | $19,000.00 |
Present Value of Cash outflows (A) | $899,000.00 | |||
Cash Inflows | ||||
Annual increase in Cash Inflows: | ||||
Year 1 | 1 | 0.909091 | $152,000.00 | $138,181.83 |
Year 2 | 2 | 0.826446 | $328,000.00 | $271,074.29 |
Year 3 | 3 | 0.751315 | $391,000.00 | $293,764.17 |
Year 4 | 4 | 0.683013 | $442,000.00 | $301,891.75 |
Salvage Value | 4 | 0.683013 | $78,000.00 | $53,275.01 |
Present Value of Cash Inflows (B) | $1,058,187.05 | |||
Net Present Value (NPV) (B-A) | $159,187.05 |
Computation of Present Value Index | ||
Particulars | Alternative 1 (Van) | Alternative 2 (Truck) |
Present Value of Cash Inflows | $1,169,277.84 | $1,058,187.05 |
Initial Cash Outflows | $832,000.00 | $899,000.00 |
Present Value Index (PV of Cash Inflows / PV of cash outflows) | 1.41 | 1.18 |
Note: As PV factor table not provided in question, therefore actual answer may differ due to rounding off differences.
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