Question

# Net Present Value Method Rapid Delivery, Inc., is considering the purchase of an additional delivery vehicle...

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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