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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