Question

# On Time Delivery Inc. is considering the purchase of an additional delivery truck for \$85,000 on...

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