Question

Net Present Value Method

Rapid Delivery, Inc., is considering the purchase of an additional delivery vehicle for $38,000 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 $65,000 per year for each of the next five years. A driver will cost $46,000 in 2016, with an expected annual salary increase of $4,000 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 2016-2020.

	Annual Net Cash Flow
2016	$
2017	$
2018	$
2019	$
2020	$

b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. 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	$

c. Is the additional truck a good investment based on your analysis?

Answer 1

Solution a:

Computation of Expected annual net cash flow - Rapid Delivery Inc.
Particulars	2016	2017	2018	2019	2020
Additional revenues	$65,000.00	$65,000.00	$65,000.00	$65,000.00	$65,000.00
Less: Driver cost	$46,000.00	$50,000.00	$54,000.00	$58,000.00	$62,000.00
Less: Annual operating costs	$2,000.00	$2,000.00	$2,000.00	$2,000.00	$2,000.00
Add: salvage value					$7,000.00
Annual net cash inflows	$17,000.00	$13,000.00	$9,000.00	$5,000.00	$8,000.00

Solution b:

Computation of NPV
					Particulars	Period	PV Factor (12%)	Amount	Present Value
Cash outflows:
Initial investment	0	1	$38,000	$38,000
Present Value of Cash outflows (A)				$38,000
Cash Inflows
2016	1	0.893	$17,000	$15,181
2017	2	0.797	$13,000	$10,361
2018	3	0.712	$9,000	$6,408
2019	4	0.636	$5,000	$3,180
2020	5	0.567	$8,000	$4,536
Present Value of Cash Inflows (B)				$39,666
Net Present Value (NPV) (B-A)				$1,666

Solution c:

Yes, additional truck is a good investment.