Question

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?

Answer 1

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