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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