Question

i Problem 10-16A Using present value techniques to evaluate alternative investment opportunities Swift 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. Swift Delivery recently acquired approximately $4 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 $900,000. 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 $325,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $100,000. Operating the vans will require additional working capital of $50,000, 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 Year 2 Year 3 Year 4 $175,000 $375,000 $450,000 $500,000 The large trucks are expected to cost $1,000,000 and to have a four-year useful life and a $81,250 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to $20,000. Swift Delivery's management has established a 10 percent desired rate of return. Page 471

Answer 1

Answer:

Requirement a.

SWIFT DELIVERY
Net Present Value Calculations
Alternative 1:
Cash Inflows	Amount ($)	Table Value	Present Value ($)
Year 1	175,000	0.909	159,075
Year 2	375,000	0.826	309,750
Year 3	450,000	0.751	337,950
Year 4	500,000	0.683	341,500
Salvage Value	81,250	0.683	55,494
Total Cash Inflow			1,203,769
Cash Outflows:
Cost of Trucks	10,00,000
Training Cost	20,000
Net Present Value	183,769

Alternative 1:
Cash Inflows	Amount ($)	Table Value	Present Value ($)
Annual Cash Inflows	325,000	3.170	1,030,250
Salvage Value	100,000	0.683	68,301
Working Capital Recovery	50,000	0.683	34,150
Total Cash Inflow			1,132,701
Cash Outflows:
Cost of Vans	9,00,000
Working Capital Increase	50,000
Net Present Value	182,701

Requirement b.

Pv Index = Present Value of Future Cash Flows / Initial Investment

Present Value Indexes:

Alternative 1 = ($ 1,203,769 / 1,020,000) =  1.18

Alternative 2 = ($ 1,132,701 / 950,000) =  1.19

Requirement c.

Net Present Value of Alternative 1 is higher than Alternaive 2, but Present Value Index of Alternative 2 is higher than Alternative 1.

Alternative 2 Should be Choosen as it represents a higher yeild on the initial ivestments.

Note : Table Used For Above Solution

Year	PV Factor
1	0.909
2	0.826
3	0.751
4	0.683
PV of Annuity (4 Yrs)	3.170