Question

net present value method

Net Present Value Method 20% Rapid Delivery, Inc., is considering the purchase of an additional delivery vehicle for $32,000 on January 1, 2016. The truck is expected to have a five-year life with an expected residual value of $7,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $51,000 per year for each of the next five years. A driver will cost $36,000 in 2016, with an expected annual salary increase of $3,000 for each year thereafter the annual operating costs for the truck are estimated to be $2,000 per year Present Value of si at Compound Interest Year 6% 10% 12% 15% 1 0 .943 0.909 0.93 0.870 0.833 0900826 0797 0705 0.594 0.40 0.75 0.712 0.658 0.579 0.792 0.683 0.636 0.482 0.74 0.631 0.567 0.402 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.375 0.279 0.467 0.404 0.327 0.233 9 0 .592 0.424 0.361 0.24 0.194 100.558 02386 032 0247 016 0572 0.497 stant for 2016-2020 .. Determine the expected annual net cash flows from the delivery truck Annual Net Cash Flow 2016 2017 2019 2020

Answer 1

Solution Purchase price of truck (Initial investment) Residual value of truck Life of the truck Discount rate $32,000 $7,000 5 Years 10% Required (a): Computation of expected annual net cash flows from the investment Year Revenue Less: Driver salary Less: Annual Operating Cost Add: Residual Value Annual net cash flows 2016 2017 2018 2019 2020 $51,000 $51,000 $51,000 $51,000 $51,000 ($36,000) ($39,000) ($42,000) ($45,000) ($48,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) sol $0 sol $0 $7,000 $13,000 $10,000 $7,000 $4,000 $8,000 Year 2016 2017 2018 2019 2020 Annual net cash flows $13,000 $10,000 $7,000 $4,000 $8,000 Required (b): Net present value of the investment Year Annual net cash flows Present Present value Value Factor of annual cash @ 10% flows 2016 $13,000 0.909 2017 $10,000 0.8261 2018 $7,000 0.751) 2019 $4,000 0.683 2020 $8,000 0.621 Present value of annual net cash flow Less: Investment Net present value $11,817 $8,260 $5,257 $2,732 $4,968 $33,034 ($32,000) $1,034 Required (c): The Net present value of the investment is positive, which indicates that the investment shall provide the desired rate of return, hence the additional truck is a good investment.