Question

AM Express Inc. is considering the purchase of an additional delivery vehicle for $45,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of $6,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $60,000 per year for each of the next five years. A driver will cost $42,000 in 20Y1, 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 $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. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 10%. 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 flow $ Less investment $ Net present value $

Answer 1

Net Present Value (NPV) approach. It the difference between the present value of cash inflows and initial cash outflows. It helps in making project investment decisions. If the NPV is positive then the project should be accepted and if negative then it should be rejected.