Question

Situation: You are deciding to start a delivery business in January 2020. The initial investment includes a small truck which costs $70,000. Other expenses were included in the expected cash flows. The truck has a useful life of 5 years and an estimated residual value at the end of the year of $10,000 (the amount expected the truck can be sold). Depreciation is the only non-cash expense. The net cash flows of each year in the following 5 years are estimated as follows: Initial investment: $70,000 Net cash flow year 1: (20,000) Net cash flow year 2: 10,000 Net cash flow year 3: 20,000 Net cash flow year 4: 40,000 Net cash flow year 5: 30,000 Estimated sale of truck year 5: 10,000 Question 3: If your required rate of return is 8%, what would be your decision based on the net present value method (NPV)? Use the table below to calculate NPV. Year Cash Flow PV Factor Present Value NPV Decision? Why?

Answer 1

Year	Cash flow	PV factor at 8%	Present value [cash flow * PV factor]
Now	-70000	1	-70000
1	-20000	.92593	-18518.6
2	10000	.85734	8573.4
3	20000	.79383	15876.6
4	40000	.73503	29401.2
5	30000+10000Salvage value = 40000	.68058	27223.2
NPV			-7444.2

since NPV is negative ,Truck should not be purchased .

**Find present value factor using the formula 1/(1+i)^n where i = 8% & n=1,2,3,4,5 or using present value table