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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