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 | $ |
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
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