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 $

Homework Answers

Answer #1

(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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