On Time Delivery Inc. is considering the purchase of an additional delivery truck for $85,000 on January 1, 20Y4. The truck is expected to have a five-year life with an expected residual value of $8,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $70,000 per year for each of the next five years. A driver will cost $25,000 in 20Y4, with an expected annual salary increase of $1,000 for each year thereafter. The operating costs for the truck is estimated to cost $9,000 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 20Y4–20Y8. If required, use the minus sign to indicate an overall negative annual net cash outflow.
| Annual Net Cash Flow | |
| 20Y4 | $ 36,000 |
| 20Y5 | $ 35,000 |
| 20Y6 | $ 34,000 |
| 20Y7 | $ 33,000 |
| 20Y8 | $ 40,000 |
b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the table of present value of $1 provided above.
| Present value of annual net cash flow | $ _____________ |
| Investment |
$ 85,000 |
| Net present value | $ ______________ |
|
expected annual net cash flows |
||||
|
year |
Revenue (1) |
Salary of driver (2) |
Operating expense (3) |
Cash flow[1 -(2+3)] |
|
20Y4 |
70,000 |
25,000 |
9,000 |
36,000 |
|
20Y5 |
70,000 |
26,000 |
9,000 |
35,000 |
|
20Y6 |
70,000 |
27,000 |
9,000 |
34,000 |
|
20Y7 |
70,000 |
28,000 |
9,000 |
33,000 |
|
20Y8 |
70,000 |
29,000 |
9,000 |
32,000 |
|
year |
Cash flow |
Discounting factor (12%) |
discounted cash flow (present value) |
|
20Y4 |
36,000 |
0.8929 |
32,144 |
|
20Y5 |
35,000 |
0.7972 |
27,902 |
|
20Y6 |
34,000 |
0.7118 |
24,201 |
|
20Y7 |
33,000 |
0.6355 |
20,972 |
|
20Y8 |
32,000 |
0.5674 |
18,157 |
|
Total |
123,376 |
||
|
NPV = present value - initial investment |
|
= 123,376 - 85,000 |
|
= 38,376 |
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