Question

Rundle Dellvery 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. Rundle Delivery recently acquired approximately $6.6 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 $750,000. 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 $330.000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $104,000. 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 $158,000 Year 2 $317,000 Year 3 $195,000 Year 4 $440,000 The large trucks are expected to cost $830,000 and to have a four-year useful life and a $85.000 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to $12,000. Rundle 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 ..&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.)

Rundle Delivery is a small company that transports business packages between New York and Chicago it operates a fleet of small vans that move packages to and from a central depot within each city and uses a common carrier to deliver the packages between the Depot it's in the two cities. Rundle delivery recently acquired approximately 6.6 million of cash capital from its owners and his president George Hay is trying to identify the most profitable way to invest these funds

Answer 1

Hi,

To calculate net present value of an investment, present value of each cash flow shall be calculated first and then adding up all present values will give NPV of that investment.

Present Value = CF / (1+i)^n

where, 'CF' means cash flow, 'i' means desired rate of return and 'n' means period

Purchase of City Vans

Year	Initial Outflow / Salvage Value	Additional Inflow	Addl working capital	Net Cashflow	PV of CF
0	(750,000.00)		(41,000.00)	(791,000.00)	(791,000.00)
1		330,000.00		330,000.00	300,000.00
2		330,000.00		330,000.00	272,727.27
3		330,000.00		330,000.00	247,933.88
4	104,000.00	330,000.00	41,000.00	475,000.00	324,431.39
			Net Present Value		354,092.55

Purchase of Trucks

Year	Initial Outflow / Salvage Value	Reduced Outflow	Training Cost	Net Cashflow	PV of CF
0	(830,000.00)		(12,000.00)	(842,000.00)	(842,000.00)
1		158,000.00		158,000.00	143,636.36
2		317,000.00		317,000.00	261,983.47
3		395,000.00		395,000.00	296,769.35
4	85,000.00	440,000.00		525,000.00	358,582.06
			Net Present Value		218,971.25

Present Value Index = Sum of PV of all future cash flows / Initial investment

Purchase of City Vans

PVI

1,145,092.55 / 791,000 = 1.45

Purchase of Trucks

PVI

1,060,971.25 / 842,000 = 1.26