Question

Net Present Value Method for a Service Company

Coast-to-Coast Inc. is considering the purchase of an additional delivery vehicle for $41,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of $5,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $75,000 per year for each of the next five years. A driver will cost $52,000 in 20Y1, with an expected annual salary increase of $4,000 for each year thereafter. The annual operating costs for the truck are estimated to be $3,000 per year.

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

a. Determine the expected annual net cash flows from the delivery truck investment for 20Y1-20Y5.

	Annual Net Cash Flow
20Y1	$
20Y2	$
20Y3	$
20Y4	$
20Y5	$

b. Compute the net present value of the investment, assuming that the minimum desired rate of return is 20%. Use the table of the present value of $1 presented above. When required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.

Present value of annual net cash flows	$
Investment
Net present value	$

c. Is the additional truck a good investment based on your analysis?
, because the net present value is  

Answer 1

a. Determine the expected annual net cash flows from the delivery truck investment for 20Y1-20Y5.

	Annual Net Cash Flow
20Y1	$75000-52000-3000-41000 = -21000
20Y2	$20000-4000 = 16000
20Y3	$16000-4000 = 12000
20Y4	$12000-4000 = 8000
20Y5	$8000-4000 = 4000+5000 = 9000

b. Compute the net present value of the investment, assuming that the minimum desired rate of return is 20%. Use the table of the present value of $1 presented above. When required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.

Present value of annual net cash flows	$42186
Investment	-41000
Net present value	$1186

c. Is the additional truck a good investment based on your analysis?
,Yes because the net present value is positive