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 \$39,000 on January 1, 2016. The truck is expected to have a five-year life with an expected residual value of \$7,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be \$49,000 per year for each of the next five years. A driver will cost \$33,000 in 2016, with an expected annual salary increase of \$3,000 for each year thereafter. The annual operating costs for the truck are estimated to be \$2,000 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 \$

c. Is the additional truck a good investment based on your analysis?

 A Year Revenue Operating Cost Drivers Salary Residual Value Net Cash Flows 2016 49000 2000 33000 14000 2017 49000 2000 36000 11000 2018 49000 2000 39000 8000 2019 49000 2000 42000 5000 2020 49000 2000 45000 7000 9000 A B A*B B Year Net Cash Flows Discount Factor @ 6% Present Value of Cash Flow 2016 14000 0.943 13202 2017 11000 0.890 9790 2018 8000 0.840 6720 2019 5000 0.792 3960 2020 9000 0.747 6723 Present Value of Cash InFlow 40395 Less: Investment 39000 NPV 1395 C Since the NPV is Positive it is worthy investing in Truck