Net Present Value Method
On Time Delivery Inc. is considering the purchase of an additional delivery truck for $32,000 on January 1, 20Y4. The truck is expected to have a fiveyear 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 $68,000 per year for each of the next five years. A driver will cost $50,000 in 20Y4, with an expected annual salary increase of $4,000 for each year thereafter. The operating costs for the truck is estimated to cost $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 20Y4–20Y8. If required, use the minus sign to indicate an overall negative annual net cash outflow.
Annual Net Cash Flow  
20Y4  $ 
20Y5  $ 
20Y6  $ 
20Y7  $ 
20Y8  $ 
b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the table of present value of $1 provided above. If required, use the minus sign to indicate a negative net present value.
Present value of annual net cash flow  $ 
Investment  
Net present value  $ 
c. Which of the following statements regarding the additional truck investment is true?
The total present value of cash flows from the delivery truck investment is less than the total purchase price of the truck.
The total present value of cash flows from the delivery truck investment is greater than the total purchase price of the truck.
The total present value of cash flows from the delivery truck investment is equal to the total purchase price of the truck.
The annual net cash flows from 20Y4 to 20Y8 are all less than $11,000.
3 more Check My Work uses remaining.
Year 
Add. Revenue 
Driver’s cost 
Op Cost 
Residual Value 
Annual Net Cash Flow 
PVF @12% 

2014 
68000 
50000 
3000 
15000 
0.893 
13395 

2015 
68000 
54000 
3000 
11000 
0.797 
8767 

2016 
68000 
58000 
3000 
7000 
0.712 
4984 

2017 
68000 
62000 
3000 
3000 
0.636 
1908 

2018 
68000 
66000 
3000 
5000 
4000 
0.567 
2268 
6th column is the answer to part (a)
b.Net Present Value
Present Value of Net Annual Cash Flow 
31322 
Investment 
32000 
Net Present Value 
678 
c) The total present value of cash flows from the delivery truck investment is less than the total purchase price of the truck.
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