Question

Net Present Value Method

Rapid Delivery, Inc., is considering the purchase of an additional delivery vehicle for $57,000 on January 1, 2016. The truck is expected to have a five-year life with an expected residual value of $5,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $77,000 per year for each of the next five years. A driver will cost $54,000 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 $3,000 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 6%. 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

a. Expected annual net cash flows from the delivery truck investment for 2016 – 2020

Year	Additional Revenue	Driver Salary	Operating cost	Salvage Value	Annual Net Cash Flow
2016	77,000	54,000	3,000	-	20,000
2017	77,000	58,000	3,000	-	16,000
2018	77,000	62,000	3,000	-	12,000
2019	77,000	66,000	3,000	-	8,000
2020	77,000	70,000	3,000	5,000	9,000

b. Net present value of the investment

Present value of annual net cash flow	$56,239
Less : Investment	($57,000)
Net present value [NPV]	- $761 [Negative NPV]

Present value of annual net cash flow

= (20,000 x 0.943) + (16,000 x 0.890) + (12,000 x 0.840) + (8,000 x 0.792) + (9,000 x 0.747)

= $56,239