Question

# AM Express Inc. is considering the purchase of an additional delivery vehicle for \$31,000 on January...

AM Express Inc. is considering the purchase of an additional delivery vehicle for \$31,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of \$6,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be \$62,000 per year for each of the next five years. A driver will cost \$45,000 in 20Y1, with an expected annual salary increase of \$4,000 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 20Y1-20Y5.

 Annual Net Cash Flow 20Y1 \$ 20Y2 \$ 20Y3 \$ 20Y4 \$ 20Y5 \$

b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. 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 flows \$ Investment \$ Net present value \$

(a)Expected annual net cash flows from the delivery truck investment

 Year Additional Revenue Driver Salary Operating cost Salvage Value Annual Net Cash Flow 20Y1 \$62,000 \$45,000 \$2,000 - \$15,000 20Y2 \$62,000 \$49,000 \$2,000 - \$11,000 20Y3 \$62,000 \$53,000 \$2,000 - \$7,000 20Y4 \$62,000 \$57,000 \$2,000 - \$3,000 20Y5 \$62,000 \$61,000 \$2,000 \$6,000 \$5,000

b. Net present value of the investment, at 12% minimum desired rate of return

 Present value of annual net cash flow \$31,889* Investment \$31,000 Net present value \$889

*Present value of annual net cash flow

= (15,000 x 0.893) + (11,000 x 0.797) + (7,000 x 0.712) + (3,000 x 0.636) + (5,000 x 0.567)

= \$31,889

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