Question

# Net Present Value Method On Time Delivery Inc. is considering the purchase of an additional delivery...

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 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 \$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.

#### Homework Answers

Answer #1
 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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